Question

In the accounting world, financial statements must be prepared a certain way. Many people rely on the accuracy of these statements, both internally to the company and externally. Why do you think its so important for financial statements to be prepared a certain way?

Answer 1

A company’s financial statements provide various financial information that investors, creditors and analysts use to evaluate a company’s financial performance. Much of the information presented in a financial report is required by law or by accounting standards. Financial statements are important for company management because they act as a means of communicating past successes as well as future expectations. By publishing financial statements, management can communicate with interested outside parties about its accomplishments running the company. As all stakeholders rely upon these statements for taking various decisions, they must follow accounting concepts and conventions. They must be reliable, understandable, relevant and comparable. All these essentials of financial statements can be fulfilled only if they are prepared in certain way based on the principles of accounting.