Q.State the objectives of preparing financial statements.

Financial statements are prepared not for their own sake but to give owners, managers, lenders and the government a clear, usable picture of the business.

Each statement serves a distinct purpose — the Statement of Profit and Loss for performance, the Balance Sheet for position, and the Cash Flow Statement for liquidity.

Financial statements are prepared to meet several definite objectives:

1. To present a true and fair view of the financial performance — the profit earned or loss incurred during the period, through the Statement of Profit and Loss.
2. To present a true and fair view of the financial position — the assets owned and the liabilities owed as at the close of the period, through the Balance Sheet.
3. To disclose the earning capacity (operating results) — so that owners and managers can judge how profitably the resources of the business have been employed.
4. To provide information useful for decision-making to the various users — owners deciding whether to reinvest, lenders deciding whether to lend, management deciding how to run the business.
5. To disclose the changes in the firm's resources and obligations, and, through the Cash Flow Statement, how cash was generated and used during the period.
6. To serve as a basis for taxation and statutory compliance, since tax and many legal filings are computed from the reported figures.

Taken together, these objectives explain why the statements convert a year's individual transactions into a compact, comparable picture of how the business performed and where it stands.

A common mistake is to repeat the characteristics of financial statements instead of their objectives — the question asks why they are prepared, not what they are like. Another is to mention only profit measurement and forget the equally important objective of showing the financial position and of serving external users such as lenders and the tax authorities.