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Why Accurate Financial Statements Are Critical for Businesses

Narendra Kumar

| Updated: Dec 15, 2017 | Category: Finance & Accounting, Financial Reporting

Financial Statements

How important are accurate financial statements for companies? The value for people who own and operate the company can be over-stated. There are various types of financial statements that are critical for any company/organization including:

  • Balance Sheet
  • Cash Flow Statement
  • Income Statement
  • Statement of Comprehensive Income
  • Statement of Stockholder’s Equity

The figures in such financial statements play a big part in planning strategies, making decisions, estimating failures, determining success, and getting the word out about a company.

Accuracy of Companies’ Financial Statements

It’s important for the financial statements of companies to be as accurate as possible. This might seem like a case of stating the obvious but there are several reasons why this is important including the following reasons:

  • Errors

It’s important to catch errors in financial statements. This can help to avoid possible issues like being engaging in any wrongdoing. In the case that illegal activity is happening it can be caught when there are discrepancies in a company’s figures.

This explains why companies spend a lot of time and money reconciling their accounts and verifying each entry. This helps to check if any tampering has taken place. It can also help to check if any accounting mistake has been made. Both are things your company will definitely want to find and fix in order to avoid a lot of issues.

During recent years investment banking, in particular, has resulted in many accounting issues in order to cover big losses in trading. The losses were hidden due to financial reporting systems being inefficient. This explains why regulators now ask financial institutions like banks to focus more on the methods they use for internal accounting.

  • Tax Liability

There’s no question that corporate tax rates are sky-high. When companies earn big profits, they must also pay high taxes. In fact, companies are often surprised after figuring out the small net income they have after paying taxes to local and national governments.

How about the process of lowering the tax burden? It’s possible but it’s also important to have very exact financial numbers. However, if that didn’t happen the resources might be depleted quickly. On the other hand, accurate financial statements are critical for the government. That’s because several companies tweak their reports in an attempt to avoid paying their fair share of taxes. So it’s critical for companies to maintain and report accurate tax figures to avoid any related problems.

  • Trust

It’s important to build trust with investors. They want to see that the company is succeeding so they feel comfortable about investing in the company. Is it enough for the company’s balance sheets showing a profit? It’s a state but there are times when a company’s balance sheet actually shows a profit but later it’s discovered the company was actually in the red.

There are even cases when large companies and accounting companies shutter because they’ve fudged financial statements. After such reports, it shouldn’t be surprising that today the public is more concerned about companies filing accurate financial statements. In fact, governments are also requiring stricter accounting compliance. This is critical to help prevent companies from reporting fake financial numbers.

  • Decision Making

When companies make decisions it’s important to evaluate financial statements. Here’s how it works. A company’s finance manager reviews the value of assets that he holds. He then decides if the company can afford to make more purchases. After the value of assets is greatly depreciated there are questions about if they should be sold.

Companies require more funds in order to expand their business. Accountants look at the balance sheets debts, other loans, and shareholders capital to figure out the kind of financing the company can afford. When the company must pay divided the company’s CFO reviews made profits, debts to be paid, and provisions for different reserves. They then decide what the amount of the divided can be.

Companies can make better decisions and be planning when they have accurate financial statements. Different statements like fund flow, working capital, and cash flow must be reviewed daily. This is done to evaluate the amount of money a company is making, the amount that’s needed reserves to be saved, etc. the company can then determine the steps it should take in order to boo sales and financing.

  • Transparency

Today it’s more important than ever for companies to practice transparency including financial transparency. It’s even small numbers on a company’s balance sheet can have a big effect on the company. When assets are purchased their value usually decreases. A certain percentage of the item’s value decreases due to the process of depreciation.

A company might report a particular number as the revenue it’s earned. However, it’s important to accurately state the amount that’s actual cash and the value that account receivable. There are several important figures that provide a lot of information to managers and shareholders. They include Profit before/after tax, profit after interest, tax, and appreciation. It’s important to know what these figures are about since they have a major effect on your company.

  • Payment Cycles

Financial statements’ accuracy is critical in order to optimize the Accounts Payable/Receivable cycles. Various other outgoing payments include daily wages/salaries that must be paid, inventory management Accounting, dividends to shareholders, and creditors paid. These actions are possible when a company’s financial numbers are accurate. In the case, loans are overdue a company must know the amount of interest that must be paid/received. Calculations can only be done when the correct figures are available.

The bottom line is it’s important for a company to maintain accurate financial statements. This can help to avoid a lot of potential problems. The reasons mentioned above are just some of the many reasons why this is critical for all companies. There are various accounting standards companies should follow in order to generate the accounting statements. IT’s a key factor in making sure finance/accounting departments show accurate figures to management and stakeholders. Taking this action can help to avoid a lot of potential problems including ones that affect the company’s profits and other factors.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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