A reports regarding a firm’s financial position,

A financial statement is a compilation of reports regarding a firm’s financial
position, financial performance and cash flows. It usually consists a balance
sheet, statement of profit or loss and statement of cash flows. If a financial
statement is to be released to external users, it is normally audited by
accountants to ensure it adheres to the International Financial Reporting
Standards (IFRS) Framework developed by the International Accounting Standards
Board (IASB).

 

            One of the main user groups
identified by the IASB are investors which include shareholders and prospective
investors. Being owners of the business, shareholders would like to be informed
about the performance of their investments to evaluate the risk of their
investment and ensure that equitable returns can be made. By analysing the cash
or retained earnings segment from the balance sheet, investors can determine
whether the firms will issue large amounts of dividends or not. Moreover, potential
investors can also determine the viability of investing in a target firm by assessing
the future earnings and security of their investments. They are able to forecast
future earnings of a target company by analysing past financial statements,
specifically the operating profits from the income statement. The security of
an investment can be affirmed by the solvency and financial flexibility of a
firm.

 

            Lenders are also one of
the main user groups acknowledged by the IASB. Entities like financial institutions
or banks decide whether or not to grant loans by determining the liquidity and
financial health of a business. Banks usually do no borrow firms with
dangerously high level of debt which can be seen by comparing the debt and
equity listed in the balance sheet and examine the debt/equity ratio. Furthermore,
financial institutions also assess the ability of a company to pay back its
loans and interest charges by analysing the retained earnings in the statement
of profit or loss.

 

            The third main user
groups comprise other creditors like suppliers of inventories or capital
equipment.  Creditors require financial
statements to determine the credit worthiness of a company and they also
require reassurance before supplying goods on credit. The objective of
assessing the capability of a firm to pay back its short-term obligations can
be achieved by investigating the current assets and current liabilities in the
statement of financial position to obtain the working capital of a firm.

 

           

However, it should not be forgotten that there are also
other possible user groups of the financial statement that are not identified
by the IASB. For example, the management team of a firm which might include
hired professionals and the owner need financial statements to determine the
firm’s financial performance and position. They can then make operating,
financing and investing decisions to achieve goals like maximisation of profit,
sales revenue or even break-even profit.

 

            Besides that, the government
is also interested in financial statements due to taxation and regulatory
purposes. Tax agencies often analyse financial statements to determine the
appropriate amount of tax payable by a company. The national government
evaluates financial statements before implementing industrial policies to different
markets and financial polices like fiscal policies. The statement of cash flows
is regularly used by regulatory authorities to ensure businesses carry out
lawful business practices.

           

            In addition, trade union
representatives and employees use financial statements to evaluate the profitability
and stability of a firm. By looking at the operating profit and overheads in
the income statement, these individuals can determine the possibility of a
long-term employment and increase or bonuses in wages. Trade unions often view
retained earnings or cash to ensure the company is able to pay pensions, benefits
and compensation like workplace injury claims (Bragg, 2014).

 

            In conclusion, some of
these user groups are not recognized by the IASB because these groups might not
have any investments in the firm and thus do not have any of the shareholder’s
rights like ownership, voting power and entitlement of dividends (Investopedia,
2018). These groups have a smaller impact on a company’s operating decisions
and direction compared to the 3 main groups.