Class: A4 – LT6B
Essay: Importance of financial statements to managers, investors and creditors
Financial statements are important reports. They show how a business is doing and are very useful internally for a company's stockholders and to its board of directors, its managers and some employees, including labor unions. Externally, they are important to prospective investors, to government agencies responsible for taxing and regulating, to lenders such as banks and credit rating agencies, and to investment analysts and stockbrokers. They are especially useful to managers, investors and creditors. Firstly, managers of businesses, more than any of the other users, benefit most from the use of financial statements, especially those who are good at understanding and analyzing these statements. Managers are able to not only discover problems and find corrective actions needed through financial statements but they are also able to make projections of these statements that act as goals and standards for upcoming periods. They are then able to assess performances against these projections at the end of the accounting period. Managers are also widely concerned with the financial ratios. First the ratios provide indicators of how well the company and its business units are performing. Some of these ratios would ordinarily be used in a balanced scorecard approach. The specific ratios selected depend on the company's strategy. For example a company that wants to emphasize responsiveness to customers may closely monitor the inventory turnover ratio. Since managers must report to shareholders and may wish to raise funds from external sources, managers must pay attention to the financial ratios used by external inventories to evaluate the company's investment potential and creditworthiness. Secondly, Investors are generally considered one of the primary users of financial statements. They use the financial statements to determine the...