Importance Of The Financial Statements To The Stakeholders (Essay Sample)

THE FINANCIAL STATEMENTS
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Introduction
Financial statements which are also called financial reports are formal records of financial activities that show the financial position of a businessman entity or a person. The financial information that is relevant is presented in a manner that is structured manner and in a form that not difficult to understand. The financial report includes basic financial statements that are accompanied by a discussion or analysis by the management. A statement showing the financial position of a company or a balance sheet reports on the assets that the company has its liabilities and the owners’ equity at a particular time (Gibson, 2014).
A company’s statement of comprehensive income, the statement showing the revenues and expenses of the business, profit and loss statement, report onthe company’s income, expenses and profits. A statement on the profit and loss gives information on the operation of a business. These operations include the sales as well as the various expenses that occurred during the period that is stated. A statement of equity reports the changes of equity in an enterprise. The company’s records on the flow of cash more especially its financial activities and operating investment are recorded in the cash-flow statement. For large companies, these financial statements are complex and may include a set of footnotes that are complex (Armstrong, 2010).
The Objectives of Financial Statements
Revsine (2015) Postulates that the main objective of the financial statement is to give information about the performance, the financial position and any changes in financial position of a business. This information is essential for a several users so that they can make prudent economic decisions. The financial statements are expected to be relevant, understandable, comparable, and reliable. These qualities are important because of the assets, equity, liabilities, income. Equality and the expenses are directly related to the financial position of an organization. The statements are intended to be read and understood by readers who have some knowledge of business, economic activities and accounting and who are willing to study the information diligently (Young & Cohen, 2013).
The Use of Financial statements as communication tools
The accountants communicate important information they are therefore communicators. Accountancy is the art of relaying financial information about an entity, a business to the users who are the managers and shareholders. They communicate using financial statements that usually show in monetary terms the economic resources that are under the control of the management. Accountancy is an art because the accountant selects information that is relevant and reliable to the uses and leaves the rest out. Shareholders need this information to ensure that the managers are taking care of the resources under their control properly. The financial information is essential for the shareholders so that they can evaluate the performance of the managers. The information is also important so that the shareholder can predict the future performance. The financial statements show clearly whether the financial resources of the company have grown or diminished for a particular period (Shim, 2014).The main five basic financial statements are explained below.
Income Statement:
Barth (2014) argues that the primary statement that accountants use in measuring the performance of an entity. This report is important because it shows both the bottom-line and the topline growth of a business. In order to see how successful the company was during the period under assessment, the net income is used. The statement has another essential element that is the expenses that the company incurred in the process of generating income. The management does a comparison of the sales and expenses of the previous period and check whether there are adjustments that are required.
Balance Sheet:
It is also called the statement of the financial position. It is given that name because it provides information about the liabilities, assets, the organization’s and the owner’s equity. The balance sheet is different from the income statement because it is prepared at a particular date and not a period of assessment. It is, therefore, shows the financial position of an organization in a specific time and it gives the managers a true reflection of the company at a specifictime (Barth, 2014).
The statements give a reflection of the resources that the company owns and the way in which those resources are financed. The management will use this information to make a comparison of the current statement with the previous ones, and identify if there are some ups and downs that need to be addressed (Collings &Loughran, 2013).
3. Cash Flow Statement:
This statement provides information about the cash flows and outflows of an organization during a specific period.
4. Statement of Stockholders’ Equity:
This report gives information concerning the equity of the stakeholders as it I indicated in the balance sheet accompanied with an explanation on why there is a change on the items. The managers should continuously do a review of the dividends given a well as the earnings that are retained. If there is a decrease in the retained earnings, the managers should check whether there are enough funds for the payment of the liabilities (Carmona, 2008).
5. Statement of Comprehensive Income:
This financial reportprovides information that cannot be included in the statement o incomes. The items like the gains and losses that are not realized, theinvestments, the foreign currency transactions and the pensions are included in this statement. This statement is essential in helping the manager make decisions on the future sources of cash (Shim, 2013).
The Importance of Financial statements to the users
The financial statements give information that is important for both decision making and steamship roles. The former means that the financial information is important in making investment decisions and therefore, it requires information that I future-oriented. The stewardship role of information means that it is used to monitor the management of the capital after investment. This focuses on the actions that took place in the past and have implications on the important financial information like the earnings of the company per share as well as the leverage ratios (Carmona, 2008).
The professional equity investors use the financial information and the direct company contacts from the financial statement. The income statement is regarded as the most useful while the management contacts are the most important in overall. The sources of information are used independently. The information on financial reporting is used together with other sources like the management contacts before a decision is arrived at. The management meetings are used in making sense of the plethora of the hard data that is provided by the companies in the financial statements themselves as well as by the analysts. However, sometimes the management meetings sometimes cover the information that is outside the financial statements (The manager’s ability to implement the strategy as well as strategic information).The management meetings would not be productive if the managers do not have the audited financialreports (JeanJean, 2008).
The non-accounting information is important to professional equity investors but it is used to add meaning to the audited data. The use an interpretation of the earning information is not always based on a total understanding of the accounting issues of measurement and recognition. The studies conducted show that the analysts fail to use all the information that is publicly available to make their forecasts. The users of financial information are divided into two categories: the external and the internal. The internal users refer to the management team that uses the accounting information that is related to decision making in the operation of the company. The external users are the people who are not involved in the operations of the company. The external users are of two categories: the ones who have a direct financial interest in the company who include the investors, the owners’ and the creditors. The other category comprises of those who do not have a direct financial interest who include the customers, the government, the employees, and others (Shim, 2013).This is prone to under-reaction and overreaction. The following are the users of the financial information:
* The owners and the investors. The stockholders in companies need financial information so that they can make decisions on what they need to do with their investments.
* The prospective investors require the financial information in order to do an assessment of the company’s potential for success and profitability. The small business also needs the financial information so that they can know whether they are making a profit or not.
* The business management needs financial information to make economic decisions. The information will be helpful in determining whether the company has enough cash, how much suppliers it requires, the profits they made the previous year and whether they met the expectations or not.
* The lenders like banks and other financial institutions require the financial information so that they can know whether the company has the ability to pay the liabilities upon its maturity.
* The traders and suppliers require the financial information in order to know whether the company is able to meet its obligations when the time is due. They are also interested in knowing whether the company I in a position to meet its short-term obligations.
* The government needs the financial i...