A business must produce a balance sheet at the end of an accounting cycle because a balance sheet helps the readers understand the source of funds and how they are used. Thus, the readers find several useful pieces of information in the balance sheet such as assets of the company, liabilities of the company, and the ownership stake held by shareholders. The balance sheet also helps the readers understand the company’s preferred source of funding whether it is debt or equity. Another useful information found in the balance sheet is the company’s liquidity position.
Similarly, a business may also produce an income statement at the end of an accounting cycle because an income statement helps readers understand the operating efficiency as well as profitability of the business. It also helps readers better understand the prospects of business as well as areas where things could be improved to improve financial status. Investors also study the income statement to determine the return on their investment.
As far as users of financial statements are concerned, one group of internal users is management. Management studies the financial statements for various reasons such as to evaluate company’s performance and identify areas for improvement. Another internal user group is employees who also get an idea of the company’s performance from the financial statements. As far as external user groups are concerned, one group is prospective investors who study financial statements to determine whether buying company’s shares is worth or not. Another user group is banks who study financial statements to determine the financial health of the company in question as to whether it would be able to fulfill its principal and interest obligations or not. The third group is government agencies who study financial statements to ensure the company is not engaged in unethical activities and is complying with all applicable rules and regulations.