Financial statement: Who use them and why?

SIMPLY WE CAN SAY THAT ALL STAKEHOLDER USE FINANCIAL STATMENT BECAUSE EACH STAKEHOLDER HAS ITS OWN INTEREST IN THE COMPANY SO THEY USE FINANCIAL STATEMENT TO EXTRACT INFORMATION OF THEIR INTEREST SO THAT THEY CAN PURSUE THEIR GOALS

the reasons that people need the financial information are:

• Make investment decisions.

• Extend credit or not.

• Assess areas of strength and weakness within the company.

• Evaluate performance of management.

• Determine whether or not the company is in compliance with regulatory requirements.

The users of financial Statements

Direct vs. Indirect Users – Direct users are those who are directly affected by the results of a company. Direct users include investors and potential investors, employees, management, suppliers and creditors. Direct users are individuals who stand to lose money financially if the company has financial problems. Indirect users are those people or groups who represent direct users. They include financial analysts and advisors, stock markets and regulatory bodies.

Internal vs. External – Internal users make decisions within the firm whereas external users make decisions from outside of the firm about whether or not to begin a relationship with the firm, continue a relationship with the firm, or change their relationship to the firm.

Financial Statements are used by all stakeholders. It may be investor (shareholder), regulator, lender, Customer ,supplier, government even employees of the company as well. And the Usage depends the kind of stakeholder and their needs i:e shareholder assess the financial statements on the basis of company growth their payout patterns and many other fundamentals supplier or lender will asses the statements on the basis of debts service and company liquidity. It's all depends what you are looking for in the company. 

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions (IASB Framework).

Financial Statements provide useful information to a wide range of users:

Managers require Financial Statements to manage the affairs of the company by assessing its financial performance and position and taking important business decisions.

Shareholders use Financial Statements to assess the risk and return of their investment in the company and take investment decisions based on their analysis.

Prospective Investors need Financial Statements to assess the viability of investing in a company. Investors may predict future dividends based on the profits disclosed in the Financial Statements. Furthermore, risks associated with the investment may be gauged from the Financial Statements. For instance, fluctuating profits indicate higher risk. Therefore, Financial Statements provide a basis for the investment decisions of potential investors.

Financial Institutions (e.g. banks) use Financial Statements to decide whether to grant a loan or credit to a business. Financial institutions assess the financial health of a business to determine the probability of a bad loan. Any decision to lend must be supported by a sufficient asset base and liquidity.

Suppliers need Financial Statements to assess the credit worthiness of a business and ascertain whether to supply goods on credit. Suppliers need to know if they will be repaid. Terms of credit are set according to the assessment of their customers' financial health.

Customers use Financial Statements to assess whether a supplier has the resources to ensure the steady supply of goods in the future. This is especially vital where a customer is dependant on a supplier for a specialized component.

Employees use Financial Statements for assessing the company's profitability and its consequence on their future remuneration and job security.

Competitors compare their performance with rival companies to learn and develop strategies to improve their competitiveness.

General Public may be interested in the effects of a company on the economy, environment and the local community.

Governments require Financial Statements to determine the correctness of tax declared in the tax returns. Government also keeps track of economic progress through analysis of Financial Statements of businesses from different sectors of the economy.

There are many users of the financial statements produced by an organization. The following list identifies the more common users of financial statements, and the reasons why they need this information:

• Company management. The management team needs to understand the profitability, liquidity, and cash flows of the organization every month, so that it can make operational and financing decisions about the business.
• Competitors. Entities competing against a business will attempt to gain access to its financial statements, in order to evaluate its financial condition. The knowledge they gain could alter their competitive strategies.
• Customers. When a customer is considering which supplier to select for a major contract, it wants to review their financial statements first, in order to judge the financial ability of a supplier to remain in business long enough to provide the goods or services mandated in the contract.
• Employees. A company may elect to provide its financial statements to employees, along with a detailed explanation of what the documents contain. This can be used to increase the level of employee involvement in and understanding of the business.
• Governments. A government in whose jurisdiction a company is located will request financial statements in order to determine whether the business paid the appropriate amount of taxes.
• Investment analysts. Outside analysts want to see financial statements in order to decide whether they should recommend the company's securities to their clients.
• Investors. Investors will likely require financial statements to be provided, since they are the owners of the business, and want to understand the performance of their investment.
• Lenders. An entity loaning money to an organization will require financial statements in order to estimate the ability of the borrower to pay back all loaned funds and related interest charges.
• Rating agencies. A rating agency will need to review the financial statements in order to give a credit rating to the company as a whole or to its securities.
• Suppliers. Suppliers will require financial statements in order to decide whether it is safe to extend credit to a company.
• Unions. A union needs the financial statements in order to evaluate the ability of a business to pay compensation and benefits to the union members that it represents.

Financial Statement, is an essential document that is used by all parties concerned with, deal with or have relationship with the organization to be fully aware with the organization's financial position i.e. shareholders, banks, auditors, regulators, suppliers, customers, exporters, importers, debtors, creditor and insurance companies,.... .

The objective of financial statements:-

  Provide information about the financial position, performance and changes in financial position of an enterprise/Company that is useful to a wide range of users in making economic decision.

*Financial Statements provide useful information to a wide range of users;

Managers:-

require Financial Statements to manage the affairs of the company by assessing its financial performance and position and taking important business decisions.

Shareholders:-

use Financial Statements to assess the risk and return of their investment in the company and take investment decisions based on their analysis.

Prospective Investors:-

need Financial Statements to assess the viability of investing in a company. Investors may predict future dividends based on the profits disclosed in the Financial Statements. Furthermore, risks associated with the investment may be gauged from the Financial Statements. For instance, fluctuating profits indicate higher risk. Therefore, Financial Statements provide a basis for the investment decisions of potential investors.

Financial Institutions (e.g. banks):-

use Financial Statements to decide whether to grant a loan or credit to a business. Financial institutions assess the financial health of a business to determine the probability of a bad loan. Any decision to lend must be supported by a sufficient asset base and liquidity.

Suppliers:-

need Financial Statements to assess the credit worthiness of a business and ascertain whether to supply goods on credit. Suppliers need to know if they will be repaid. Terms of credit are set according to the assessment of their customers' financial health.

Customers:-

use Financial Statements to assess whether a supplier has the resources to ensure the steady supply of goods in the future. This is especially vital where a customer is dependant on a supplier for a specialized component.

Employees:-

use Financial Statements for assessing the company's profitability and its consequence on their future remuneration and job security.

Competitors:-

compare their performance with rival companies to learn and develop strategies to improve their competitiveness.

General Public:-

may be interested in the effects of a company on the economy, environment and the local community.

Governments:-

require Financial Statements to determine the correctness of tax declared in the tax returns. Government also keeps track of economic progress through analysis of Financial Statements of businesses from different sectors of the economy.

Internal and external auditors, Financial analysts, banks - for loans, and investors.

financial statement is mostly used by shareholders and external stakeholders to know about the financial state of the company as well as the profitability.

the financial statement used to make a economic and financial review about the related company, it used by financial analyst and investors to take the right decision about when they invest their money with higher required rate of return.

Indicates financial data analysis (financial analysis) process to understand the risks and profits of a corporation (a business, a business or a subsidiary, or project) through recorded using different methods of accounting and financial information analysis tools.

Financial data analysis consists of: (1) re-drafting of the financial statements recorded, and (2) measurement errors analysis and modification, and (3) financial ratio analysis based on financial data modified or reformulated. It is often neglected the first two steps in this process; that is, it is not only financial ratios based on the registered numbers calculated, perhaps with some modifications. The financial analysis of the basis for assessing credit risk and valued, and make the process of evaluating the company's core.

1) Financial data analysis usually begins reshaping registered financial information. One of the common ways of wording for the statements of income in the operations division recorded items to frequent or unusual elements, the elements of non-recurring or private. In doing so, the gains can be divided into basic gains or unusual temporary gains. The idea here is that the usual gains more stable, and therefore more suitable for the processes of forecasting and evaluation. These gains usual turn are divided into net operating profit after taxes (NOPAT) and net financial costs. The budget is divided, for example, to the net operating assets (NAO), and net financial debt and equity.

2) aimed step measurement error analysis and modification to verify the validity of the registered accounting numbers. For example, it can be recorded that the numbers are bad representation or unstructured invested capital, while, for example, respect to net operating assets, which means that the return on net operating assets (RNOA) will turn barometer unstructured profitability (internal rate of return, IRR). Research and development expenses are an example of cases in which spending is expected to lead to investment in future economic benefits, suggesting that research and development should be added to the assets in the budget. Examples of modified measurement excluding financial analyst for the research and development expenses from the income statement errors, put the budget. In doing so, the capital of Research and Development consumption replace research and development expenditures in the budget. Other examples are also on the amendment of the figures recorded when the financial analyst doubted the gains in management.

3) it must be based on the analysis of financial ratios modified or hostile compiled financial statements. There are two types of ratio analysis is Ajraahma: 3.1), risk analysis, and 3.2) profitability analysis:

3.1) Risk analysis is designed primarily to detect credit risks faced by the company. It consists of risk analysis of the liquidity analysis and the ability to pay. The aim of the liquidity analysis to analyze whether the company has enough liquidity to meet its obligations when due to be paid. It is the usual methods for the analysis of the risks of not focusing on liquidity ratios, such as current interest rates and coverage. Of useful analyzes as well as the cash flow analysis. The analysis of the ability to pay, deals with the analysis of whether the company has the money, allowing them to recover from any loss or consecutive losses. It is the usual methods for the analysis of the inability to pay focus on the descent, such as equity as a percentage of total capital, and other capital structure ratios. Based on the risk analysis, the company can be classified under analysis, any given rated the danger hand, which is known as structural classification.

Risk ratios, such as current ratio, and interest coverage, and the percentage of property rights, it is not a standard norms theory. So, are common in the industry compared with the average over time. If the equity ratio is higher than the industry average company, making it less vulnerable, unlike what if this ratio exceeded the industry average. Similarly, if the equity ratio has increased over time, it represents a good signal with respect to the risk of an inability to pay.

3.2) profitability analysis refers to the analysis of capital return, such as return on equity, which is earnings divided by average equity. It can be expressed in the equity return the following equation: ROE = RNOA + (RNOA - NFIR) * NFD / E, where RNOA refers to yield net operating assets, and NFIR to the net interest rate, and NFE to the net financial debt, and E to property rights. Thus, it can clarify the sources of equity returns.

Unlike other ratios, characterized by capital return record my standard, the cost of capital (also known as the yield of the capital needed). For example, it can be compared to the equity dividend yield of necessary property rights (kE), according to the estimate, for example, pricing model of capital assets. If the property rights of return greater than the required equity return (or return on net operating assets (RNOA) is greater than the average estimated cost of the head of the financial (WACC)), it means that the company is making an economic profit at any time during the analysis period percentages. The company and check the value of their respective owners.

It can exploit its findings to the financial statements to make predictions and assess credit risks and the rights of ownership of the company's analysis. For example, if the disclosure of financial data on the increase in the outstanding performance analysis (ROE - kE> 0) over the period of time to analyze financial data, we can infer future trends. However, economic theory suggests that the competing forces will - sooner or later - and will approach the property return the rights to the necessary return. Nor have ROE - kE> 0 in a stable position, unless the company has a competitive advantage continues.

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.

Financial Statements provide useful information to a wide range of users like:

• Company management. The management team needs to understand the profitability, liquidity, and cash flows of the organization every month, so that it can make operational and financing decisions about the business.
• Competitors. Entities competing against a business will attempt to gain access to its financial statements, in order to evaluate its financial condition. The knowledge they gain could alter their competitive strategies.
• Customers. When a customer is considering which supplier to select for a major contract, it wants to review their financial statements first, in order to judge the financial ability of a supplier to remain in business long enough to provide the goods or services mandated in the contract.
• Employees. A company may elect to provide its financial statements to employees, along with a detailed explanation of what the documents contain. This can be used to increase the level of employee involvement in and understanding of the business.
• Governments. A government in whose jurisdiction a company is located will request financial statements in order to determine whether the business paid the appropriate amount of taxes.
• Investment analysts. Outside analysts want to see financial statements in order to decide whether they should recommend the company's securities to their clients.
• Investors. Investors will likely require financial statements to be provided, since they are the owners of the business, and want to understand the performance of their investment.
• Lenders. An entity loaning money to an organization will require financial statements in order to estimate the ability of the borrower to pay back all loaned funds and related interest charges.
• Rating agencies. A rating agency will need to review the financial statements in order to give a credit rating to the company as a whole or to its securities.
• Suppliers. Suppliers will require financial statements in order to decide whether it is safe to extend credit to a company.
• Unions. A union needs the financial statements in order to evaluate the ability of a business to pay compensation and benefits to the union members that it represents.

In short, there are many possible users of financial statements, all having different reasons for wanting access to this information.