What is the primary purpose of financial statements?

• A. To provide a basis for tax assessment
• B. To inform stakeholders about financial performance
• C. To fulfill legal requirements only
• D. To show potential for future growth

Answer: (B)

The primary purpose of financial statements is to inform stakeholders about a company’s financial performance. These statements provide a comprehensive overview of a company's financial activities, including income, expenses, assets, and liabilities. By presenting a clear picture of its financial health, financial statements allow investors, creditors, management, and other stakeholders to make informed decisions regarding their relationship with the company.

Stakeholders rely on this information to understand how well the company is doing, assess investments, evaluate creditworthiness, and analyze operational efficiency. They serve as a transparent means of communication to convey the results of a company’s operations over a specific period and its financial position at a certain point in time.

While tax assessment, legal compliance, and potential for future growth are relevant aspects associated with financial statements, they are not the primary purpose. Tax assessment is a function of the financial data generated, while fulfilling legal requirements pertains more to regulatory compliance than to the essence of financial reporting. Potential for future growth, while important, is more of an inference drawn from the historical data presented in the financial statements rather than a direct purpose of their preparation.