Final answer:
External financial statements are prepared according to GAAP and are intended for people outside of the company, such as investors and creditors. They provide information about a company's financial position, performance, and cash flows. External stakeholders use these statements to make informed decisions and assess the company's financial health.
Step-by-step explanation:
External financial statements refer to the financial statements that are prepared according to the Generally Accepted Accounting Principles (GAAP) and are intended for people outside of the company, such as investors, creditors, and regulators. These statements provide a summary of a company's financial position, performance, and cash flows. They typically include the balance sheet, income statement, statement of cash flows, and statement of changes in equity.
The purpose of external financial statements is to provide transparent and reliable information about a company's financial health and performance to external stakeholders. This information helps investors and creditors make informed decisions and assess the company's ability to generate profits, pay off debts, and sustain its operations.
For example, a potential investor may review a company's external financial statements to assess its profitability, liquidity, and solvency before deciding to invest. Similarly, a creditor may analyze the financial statements to evaluate the company's creditworthiness and determine the terms of a loan.