What is the main purpose of financial statements for a business?

The main purpose of financial statements is to provide formal records of financial activities. These documents, which typically include the income statement, balance sheet, and cash flow statement, serve several critical functions within a business. They summarize the company’s financial performance and position over time, allowing for an accurate assessment of profitability, liquidity, and solvency.

By compiling and presenting detailed financial information, these statements enable stakeholders—such as management, investors, creditors, and regulatory bodies—to understand how the business is operating financially. They facilitate informed decision-making as they reflect the outcomes of past actions and help in forecasting future financial performance. In essence, financial statements serve as transparent documentation of the economic activities of a business, which is essential for regulatory compliance, strategic planning, and assessing financial health.

While attracting investors is a significant benefit of having accurate financial statements, it is a secondary purpose compared to the primary function of documenting financial activities formally. Hiring practices and marketing strategies relate to different aspects of the business and are not directly served by the primary objective of financial reporting.