Users of Financial Statements

#EMBA27

Background

Financial statements have always been an important source of companies’ financial information. Its demand span centuries as a means to facilitate business evaluation and decision on investment or divestment. Decision-makers and other stakeholders demand these records on a company’s past and prospective returns and risks. The chief executive officer through the managers decides how much financial information to supply by weighing the costs of disclosure against the benefits of disclosure. However, regulatory agencies intervene in this process with various disclosure requirements that establish a minimum supply of information

Users

According to Peter Easton and Co. some of the users of financial statements include but are not limited to the following: managers, employees, stockholders, directors, investment analysts, regulators, creditors, and suppliers. For managers and employees, the well-being and future earnings potentials, demand for accounting information on the financial condition, profitability, and prospects of their companies as well as comparative financial information on competing companies and business opportunities are important. This helps them to benchmark their company’s performance and condition. Likewise, for investment analysts, these records are used in predicting companies’ future performance. Expectations about future profitability and the ability to generate cash impact the price of securities and a company’s ability to borrow money at favorable terms. Financial reports reflect information about past performance and current resources available to companies. This information allows analysts to make informed assessments about future financial performance and conditions so they can provide stock recommendations or write commentaries.

Furthermore, stockholders and directors demand financial accounting information to assess the profitability and risks of companies. Stockholders search for information useful in their investment decisions. Fundamental analysis uses financial information to estimate company value and to form buy-sell stock strategies. Both directors and stockholders use accounting information to evaluate managerial performance. Managers similarly use such information to request an increase in compensation and managerial power from directors. Outside directors are crucial to determining who runs the company, and these directors use accounting information to help make leadership decisions.

Regulators and tax agencies demand accounting information for antitrust assessments, public protection, price setting, import-export analyses, and setting tax policies. Timely and reliable information is crucial to effective regulatory policy, and accounting information is often central to social and economic policy. For example, governments often grant monopoly rights to electric and gas companies serving specific areas in exchange for regulation over prices charged to consumers. These prices are mainly determined by accounting measures.

Banks and other lenders demand financial accounting information to help determine loan terms, loan amounts, interest rates, and required collateral. Loan agreements often include contractual requirements, called covenants that restrict the borrower’s behavior in some fashion. For example, loan covenants might require the loan recipient to maintain minimum levels of working capital, retained earnings, interest coverage, and so forth to safeguard lenders. Covenant violations can yield technical default, enabling the creditor to demand early payment or other compensation. Suppliers demand financial information to establish credit terms and to determine their long-term commitment to supply chain relations. Both creditors and suppliers use financial information to monitor and adjust their contracts and commitments with a company.