Various Users of Financial Statements and How Their Needs Are Met - Literature review Example

Various Users of Financial ments and How Their Needs Are Met Francis, Schipper and Vincent (2002, p. 515) that the financial health of a company is a matter of concern to parties with an interest in the company. The companys financial health is usually gauged using financial statements, which are prepared at the end of every financial year. The law usually requires that any limited liability company must publish its financial statements at the end of the year. The financial statements usually provide a summary of how a company has performed during a given financial year. Financial statements are needed because they show the financial condition of the company, the basis on which, interested parties, such as investors, creditors, debtors, employees, management and society make decision. The three primary financial statements that a company must prepare at the end of every financial year include the balance sheet, statement of income and statement of cash flow (Marquardt, Christine and 2004, p. 298). This document will begin by explaining the three primary financial statements with respect to their purposes. The document will then discuss the various users of the financial statements and how the needs of financial statement users are met. Balance sheet is one of the most critical financial statements that a company must prepare at the end of any given financial period. The balance sheet provides a report of the companys financial position with regards to assets and liabilities. The asset side lists all the items owned by the business, such as cash, stock, equipment and machineries among others. The liability side lists everything that the business owed to outsiders, such as loans, unpaid bills and unpaid payroll (Downes and Goodman 2003, p. 36). In other words, a balance sheet provides users with an insight about the net worth of a company at any given period. The statement of income is another important financial statement that companies must prepare at the end of any given financial period. A statement of income reports the financial condition with to profitability or losses (Porter and Norton 2010, p. 32). In other words, a statement of income shows interested party whether or not a company is making profit or losses so that they can make an informed decision. The statement usually reports a companys revenues and related expenses incurred over the financial period. The statement of cash flow is also another important financial report that companies is expected to prepare at the end of the financial period. The statement of cash flow usually reconciles the profits as shown in the statement of income to the cash that a company generated during the same financial period (Kline 2007, p. 7). Additionally, a statement of cash flow also maps the incomes and expenditures that a company anticipated during a given financial year. The first major users of a financial statement are the shareholders. Shareholders are investors who have bought shares in a company. Normally, when an individual buy shares in a company, the investor becomes a shareholder in the company. This automatically gives the shareholder the right of ownership of the company. However, the main aim for buying shares in a company is to be able earns returns in the form of dividends. Therefore, financial statements are critical to shareholders because it enables shareholders to gauge whether the company in which they have invested in is making enough returns on their investment (Baker and Powell 2009, p. 64). Additionally, the financial statement enables shareholders to assess whether there are any risks that may affect their investment. After assessing the financial health of a company, shareholders can make a well-informed investment decision based on the analysis of the report. Prospective investors also form part of stakeholders who use the financial statements prepared by the company in making investment decisions. Investors are usually very risking averse. Therefore, before investing in a company, prospective investors would first analyze the financial condition to gauge if it is investing in the company is worthwhile or not. The financial statement of a company usually acts as a tool, which they use to assess the viability of investing in a given company (Friedlob and Plewa 2006, p. 82). For instance, investors can easily predict the future dividends that the company is likely to give its investors based on the profits reported in the statement of income. Therefore, publishing a credible and audited financial statement is important for prospective investors it helps them determine the financial health of a company and any risk that may be involved by investing in the company. For instance, when a companys income statement discloses fluctuating profits, this might be a clear indication of a higher risk to investors. As such, a financial statement is a critical tool for prospective investors in making an informed investment decision to avoid incurring losses. Suppliers are also major stakeholders with a greater interest on the company. Creditors are individuals or institutions that provide the company with goods or credit. Therefore, a financial statement is a very useful tool for creditors because they use it to gauge the credit worthiness of a company. This is critical for creditors it determines whether the company should be supplied with goods or not. By assessing the financial statement reported by a company, creditors can easily tell whether a company has strong credit rating and will be able to repay for the goods supplied without default (Siegel and Shim 2000, p. 101). The other users of financial statements are financial institutions. Most companies fund their operations from loans obtained from lending institutions, such as banks. However, before a financial institution grants loans to a bank, they use the most recent financial statements of a company to assess the financial strength of a company and whether or not to advance a loan or credit to the company (Krantz 2012, p. 3). Assessing the financial condition of the company is important for the lending institutions since it assist in determining the likelihood of a bad credit or loan. For instance, any decision to advance a credit or loan to a company must always be supported by strong liquidity position and asset base. Such information is gathered from the balance sheets and statement of income. Customers being major stakeholders of the company are also users of financial statements. Customers are individuals or firms that buy goods or obtain services from a company. As such, customers normally use financial statements to evaluate whether the suppliers of a company have adequate resources to ensure constantly supply of products to the company in the future (Benjamin and Stanga 2012, p. 189). This is especially important where a customer depends much on the goods supplied by a given supplier. Therefore, by using a financial statement, customers can determine whether or not the suppliers have enough resources to ensure that there would be no shortage of supplies to a company in the future. Most companies operate in a very competitive environment. Therefore, among those with an interest in the financial statement published by the company are the competitors. Competitors usually use the financial statement of their rivals to make a comparison in terms of performance (Davis, Menon and Morgan 1982, p. 310). The information gathered from the financial statements of rival companies is used for developing strategies to enhance competitiveness. Employees are also major stakeholders of the company. As such, they have an interested in knowing how the company where they are working is performing. In particular, employees normally use the financial statements to assess whether the company is making enough profit and its impact on their future salaries and job security (Solomons 1991, p. 289). For instance, when a company reports high and improving profits, this indicates that employees are likely to be rewarded through salary increments. It also means that the jobs of the employees are secure. By contrast, when the financial statement discloses losses, this shows that the company might respond by decreasing salaries of employees or laying off some in order to stay afloat. Managers are also users of a financial statement. Managers are usually charged with the responsibility of guiding the company towards the achievement of the companys visions and goals. Therefore, managers normally use financial statements as a management tool (Besley and Brigham 2008, p. 25). In this respect, managers use financial statements to evaluate how the company is performing and whether or not the objectives of the company are being met. The general public being a major stakeholders with an interest in a company are also users of a financial statement. The public mainly uses the financial statement of the company to assess the effect of the company on the economy, local community and the environment. The government being a stakeholder of a company is also interested in knowing how the company is performing. In this respect, the government uses the financial statement of the company to assess whether or not the taxes declared by the company in the financial report is correct. Additionally, the government also uses the financial statement of companies in different sectors to assess the keep track of the countrys economic progress (Koen and Oberholster 1999, 73). Financial statements are used by a number of stakeholders with an interest in the company for decision making. Therefore, to meet the needs of the users of financial statements, companies must ensure that the financial statements reflect a true and fair position of a companys state of affairs at any given time (Alexander, Sharpe and Bailey 2003, p. 13). As such, to ensure credibility, companies are expected to ensure that financial statements are audited by independent auditors before releasing them to stakeholders. The independent auditors are expected audit the financial statements and provide a detailed report as to whether or not the statements are prepared in accordance with the standards and reflect the true state of affairs of the company. Such auditors reports are important since they enhance the credibility of the financial statements as prepared by the company. In conclusion, financial statements are a useful tool for determining the financial health of a company. The three main financial statements that companies must publish at the end of the financial year include a balance sheet, statement of income and a statement of cash flows. These financial statements are critical for users because they reveal the financial condition the basis on which stakeholders, such as creditors and investors make a decision. Therefore, to ensure that the users of financial statements are met, companies should ensure that the financial statements reflect a true and fair state of affairs. 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