Purpose of financial statements

The idea

Financial statements, such as the income statement and statement of financial position, are prepared to provide information about a business's financial performance and position. Their main purpose is to help stakeholders—owners, investors, lenders, and others—make informed decisions. For example, an investor might use the income statement to assess profitability before buying shares, while a bank might review the statement of financial position to decide whether to grant a loan. Financial statements also help managers monitor performance, identify trends, and plan for the future. They must be accurate and comply with legal requirements. Understanding their purpose is essential for analysing a business's financial health and making judgements about its success.

What earns the marks

• States that financial statements provide a summary of a business's financial performance and position over a period.
• Explains that they are used by stakeholders such as owners, investors, lenders and government to make decisions.
• Describes how financial statements help managers monitor performance, control costs and plan strategically.
• Recognises that financial statements must be prepared accurately and in accordance with legal and accounting standards.
• Gives examples of specific statements, such as the income statement (profit and loss) and the statement of financial position (balance sheet), and their roles.

Common mistakes and how to put them right

• Confusing the income statement with the statement of financial position.

  Put it right: The income statement shows profit or loss over a period, while the statement of financial position shows assets, liabilities and equity at a specific date.

• Assuming financial statements are only for tax purposes.

  Put it right: They serve multiple purposes, including decision-making by various stakeholders.

• Believing that financial statements are only for internal use.

  Put it right: They are also used by external stakeholders such as investors and lenders.

Exam tips

• When asked about purpose, always link to a specific stakeholder and how they would use the information, e.g. 'a bank uses the statement of financial position to assess collateral'.
• Use correct terminology: 'income statement' and 'statement of financial position' rather than informal terms like 'profit sheet' or 'balance sheet' alone.
• For higher marks, explain how the information supports decision-making, not just what the statements contain.