What is the primary purpose of financial statements?

The primary purpose of financial statements is to inform stakeholders about the financial performance of an entity. Financial statements, which include the income statement, balance sheet, and cash flow statement, offer a comprehensive overview of a company's financial status, detailing aspects such as revenue, expenses, assets, liabilities, and equity. This information is crucial for various stakeholders, including investors, creditors, management, and regulatory bodies, as it aids in decision-making, assessing financial health, and evaluating performance trends over time.

Providing this information helps stakeholders determine profitability, liquidity, and overall financial stability, enabling them to make informed choices regarding investments, loans, or operational strategies. While financial statements may help satisfy tax obligations or record transactions, these are not their primary functions. Instead, the essence of these documents lies in their ability to communicate the financial situation and results of operations to those who have a vested interest in the company’s performance.