Financial statements act as a channel of revealing financial information about a business to individuals within and outside the business. They give a summary of the accounting process whereby the financial position of a business is made known at a time. The major reason for preparation of financial statements is to communicate financial decisions to internal and external stakeholders that the business makes. Most widely used financial statements are statement of retained earnings, balance sheet, and statement of changes of financial position.
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There are numerous reasons as to why accurate financial statements are helpful to an outsider. The potential investors need to know the profitability of the company in order to know whether to invest in that company or not. In order to invest in that, the company the investors will base their judgment depending on the financial statements that the company avails to them. Thus, inaccurate financial statements will mislead the investors. The shareholders since they are not involved with the daily running of the company. They need to be provided with accurate financial statements. This will make the shareholders know the performance of the business and where the money they have invested is going. Financial statements do indicate how the company is run. If one has no accurate financial statements, it becomes hard for one to know how well or bad her company is performing.
Accurate financial statements help the management to compare themselves with other companies in the same line. Creditors are the source of loan capital to the business. The creditors are able to assess the ability of the business to pay them using accurate financial statements (Branson, 2009). The creditors are able to assess the liquidity of the business, which helps them to know if the business is capable to pay its dues as agreed. Accurate financial statement will help creditors to determine whether their capital repayment will be made as agreed. Accurate financial statements help the bank and other lending institutions to evaluate the business for a loan. Where the money is owned to the banks, they will want to ensure that payments of interests will be made when due. They will ensure the business will repay the credit or overdraft at the agreed time. Credit agencies do require accurate financial statements to advise present and possible individuals who provide the business with goods and services about its credit worthiness.
The financial statements give the consumer the ability to assess whether the company will continue to provide them with the products they buy from it. Consumers who have a long relationship with the company will evaluate their future association by use of financial statement. Suppliers are able to know whether the business will continue being its market. Incase the business show an improvement the suppliers are able to plan where to get the additional supplies that the company requires. Accurate financial statements assist the suppliers to evaluate the prospect of the future profitable association with the business. The families of the employees are able to know whether their relatives will be in the same company. Whether the company will be able to pay their workers in time. Lending institutions will base their lending to the company’s employees from the financial statements issued by the company.
Economic analysts are able to carry out their duties accurately when provided with accurate financial statements. They can be able to advise the government and other interested parties about the performance of a sector using accurate financial statements. Financial reporters and authors of financial journals are able to provide accurate information to their clients. This leads to loyalty a thing, which is essential to the prosperity of their services. Rating agencies also need accurate financial statements to be able to assign credit rating to a given business.
Labor unions use the accurate financial statements to analyze the pay hike the business can provide to its employees. This helps them to negotiate well for their members. Financial statements help them to agitate for other benefits to their members. Potential competitors use the financial statements to find the profitability of venturing in the similar business. For them to make a reasonable decision, accurate financial statements are required.
The government uses the information provided in the financial statements to assist the tax authorities determine the accurate tax that the company is required to pay (White, 2002). It also helps in the determination of other duties that a business should pay. Government will use the financial statement in the determination of resource allocation to different economic sectors. Government may use accurate financial statements to know the businesses that require protection from unhealthy completion. For the government, to know the businesses that contribute highly to economic growth it uses financial statements.
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Stockbrokers need to have accurate financial statements to know how to value the securities of the company. This information will help them know the price to sell or buy and make a recommendation to their clients. Stockbroker will guide their clients on the performance of the business over different periods. The information will determine whether the business is growing or not. The businesses that need to the merger with a given business will require accurate financial statements to make a decisive decision. Takeovers also require accurate financial statements in order to do so. Actual competitors need accurate financial statements to benchmark their financial results. This helps them to access their management performance in a good way.
Insurance companies are able to rely on accurate financial statements. These make their work easier and time saving. They make accurate payments thus minimizes losses associated with over claim. There is also intimate relationship between the business, and insurance as the value of the claim agrees with the value the insurance company finds it worth to compensate. Bidders of the business can make accurate bidding incase the business wants to sell its assets. This leads to considerable rapport between the business and public. Contracts involving a lot of money need the providers of them to assess the financial position of the company to win that contract. This information is only available from accurate financial statements.
Past employees will need accurate financial statements to determine whether the business pay any pensions and retirement benefits paid by the business to them. Potential employees will use financial statements to assess whether it is worth seeking employment in the business. They will assess the security of their jobs in the entity, as well as the capability of the employer to offer them the pay they need. Potential employees will use financial statements to choose the best business to work in incase one is offered a job by more than one business. The organizations concerned with the supervision of industries and commerce will need accurate financial statements for them to make accurate deliberations concerning business.
Financial statements are necessary to the public because they inform the public the business social responsibilities it has undertaken. Accurate financial statements guide the public in the way they perceive the business (Wild, 1999). Business contributes to the economy in different ways, which affect the public. One of such contribution is the creation of employment opportunities and the amount of local produce they buy from the public. Accurate financial statements provide the public with news on the trends and growth of the business and different activities the business undertake.
Accurate financial statements guide the environmental activists to know whether the business is engaging itself in activities that lead to environmental degradation. Training institutes use the financial statements of the companies to know the programs that they can offer to meet the market needs. Political parties use financial statements to make their manifestations. If financial statements are not accurate, it will lead to political parties making wrong manifestation.
Accurate financial statements are vital to corporate raiders as they are provided with information that enables them to make a wise decision when valuing the value of the securities they want to purchase. Consumer advocates can use the accurate financial statements to urge the business to lower their prices incase business make massive profits by overcharging the customers.
Think tanks are bodies that engage in conducting research and advocacy in different areas such as economics. In order for think tank, to make a favorable decision they need to have accurate financial statements. Media require accurate financial statements to ensure the reports they avail to the public are not misleading. Media has large clients who listen to them and inaccurate information transmitted by them will make many individuals make a wrong decision.
Branson, J. (2009). Who are the users of financial statements. Financial statements, 31-34.
White, G. (2002). Analysis and use of financial statements. Virginia: Wiley.
Wild, J. (1999). Analysis of financial statements. Michigan: McGraw-Hill.