Financial statements are required by the Securities and Exchange Commission. They are used to determine whether or not a company is following certain laws such as those created by Sarbanes-Oxley. There are three main components of financial statements: assets, liabilities, and equity.
Financial statements are crucial for assessing the financial health of a company. These documents are used to create complicated models, as well as monitor the performance of a company. Yet, these documents have their limitations. They can only provide information about a company's financial situation at one point in time and cannot always give accurate predictions about future outcomes.
For example, management efficiency and reputation, source of sale and purchase, contract dissolution, quality of produced goods, employee morale, royalty, and employee relationships to and with management, all of which are immeasurable in terms of money, are not disclosed in the financial statements.
"The purpose of financial statements is to give information about an enterprise's financial situation, performance, and changes in financial status that may be used by a variety of users to make economic decisions." Financial statements should be easy to comprehend, relevant, trustworthy, and comparable.
Internal users are those who use financial data within a company organisation. Owners, managers, and employees are examples of internal users. External users are those who use accounting data outside of the corporate entity (organisation).