What is the necessity of preparing formal financial statements if all of the data are in the statement columns of the worksheet?

Expert Answers
Michael Ugulini eNotes educator| Certified Educator

It is accurate that financial data is readily available in the statement columns of the Worksheet. However, there are two main reasons for preparing formal financial statements. One reason is the mandatory requirement from authorities such as the Securities and Exchange Commission (SEC) in the United States if a business is publicly-traded. Publicly-traded enterprises must have formal financial statements prepared on a regular basis according to Generally Accepted Accounting Principles (GAAP).

The second reason is the need that other external users have for formal financial statements. Banks, venture capital firms, institutional and individual investors, business and market analysts, and others demand formal financial statements, which present a current picture of the financial health or otherwise of a business. These entities do not want to have to interpret a Worksheet spreadsheet to find the relevant data they desire. They desire separate formal financial statements such as Balance Sheets, Cash Flow Statements, and Income Statements.

As an addendum, clear, concise, separate formal financial statements make for easier and more efficient business analysis for internal use in a company. It’s much easier, for example, to peruse a Cash Flow Statement itself when looking for specific Cash Flow information, than to have to go to a more cumbersome Worksheet to pinpoint the financial data.

Only using a Worksheet and not preparing formal financial statements is not really a common practice for businesses that have reporting requirements and deal with external users of their data. On top of that, for their own benefit, a business will typically find it more useful to prepare separate formal financial statements as a tool for quality, organized business analysis.