Intermediate Accounting I
In today’s day and age there is no easy way of telling which companies are doing well and which are almost down in the dumps. Banks, lending facilities, and/or external stakeholders are greatly interested in seeing where companies are in the market compared to their competitors. These companies take the most risk by investing their monies into entities that are not started, maintained, or organized by themselves. There are many factors that come into play when external stakeholders are looking to make a decision on where to place their money. Those factors include, but are not limited to, the items being sold or produced, the message the company has to offer, etc. Most importantly external stakeholders use financial information to make decisions on whether the company is profitable, has too much debt, etc. “The information provided by the financial statements help support their decisions and actions for the company.” (Baskerville, May 2011) Basically banks, lending facilities, and/or stakeholders need to know where a company stands in the market and in profitability. The best way for them to conclude that is by looking at companies’ Financial Statements, financial reports, and with the use of financial ratios.
Before getting into detail on financial reporting and what that entails it is essential to understand who exactly those external stakeholders are. External stakeholders are composed of investors, lenders, suppliers, customers, Government agencies, competitors, labor unions, supporters and opponents, just to name a few. These are essentially people and/or companies that may have interest in what goes on with known businesses or companies. Stakeholder’s main interest are profit growth and dividends because their goal is to get a return on the money they have invested. “Investors are stakeholders that buy shares in a company.” (Baskerville, May 2011). Their primary interest in knowing that the company is doing well so that they can put their money into the company for a greater return. Lenders are external stakeholders who lend money to that enterprise on either a short or a long term basis usually charging a fee or interest to make some money in return. Lenders are regularly composed of banks or other types of financial institutions. Suppliers are also interested in how a company is doing because they want to make sure that they will get paid for their products and services at a later time. Customers are stakeholders that want to know the financial strength of a company because they want to know that their supplier is going to be a dependable source. Competitors are also financial stakeholders because they have a need to know where their companies lie in the market and the only way to see that is by comparing their group to others. Media plays an important part as external stakeholders because they “use information to publish in their mass communication outlets” (Baskerville, May 2011). Labor unions although are not interested in putting their money into a business. However, they are still interested in their well being because they use financial statements to see how much a pay increase the company can afford for upcoming negotiations and for the well being of the employees, which is why they too are considered external stakeholders. Supporters and opponents are also considered stakeholders because they want to see evidence of their position.
Financial Reports show a companies business health. It allows the viewer to see where the company stands on a financial basis. The statements most commonly used and accepted in the Accounting practice are the Income Statements, the Balance sheet, and the Statements of Cash Flows. Each financial report holds importance all on its own but is used on a collective basis to conclude whether or not to invest or place their money in that corporation....