A financial statement is a compilation of reports regarding a firm’s financialposition, financial performance and cash flows. It usually consists a balancesheet, statement of profit or loss and statement of cash flows. If a financialstatement is to be released to external users, it is normally audited byaccountants to ensure it adheres to the International Financial ReportingStandards (IFRS) Framework developed by the International Accounting StandardsBoard (IASB). One of the main user groupsidentified by the IASB are investors which include shareholders and prospectiveinvestors. Being owners of the business, shareholders would like to be informedabout the performance of their investments to evaluate the risk of theirinvestment and ensure that equitable returns can be made. By analysing the cashor retained earnings segment from the balance sheet, investors can determinewhether the firms will issue large amounts of dividends or not. Moreover, potentialinvestors can also determine the viability of investing in a target firm by assessingthe future earnings and security of their investments.
They are able to forecastfuture earnings of a target company by analysing past financial statements,specifically the operating profits from the income statement. The security ofan investment can be affirmed by the solvency and financial flexibility of afirm. Lenders are also one ofthe main user groups acknowledged by the IASB. Entities like financial institutionsor banks decide whether or not to grant loans by determining the liquidity andfinancial health of a business.
Banks usually do no borrow firms withdangerously high level of debt which can be seen by comparing the debt andequity listed in the balance sheet and examine the debt/equity ratio. Furthermore,financial institutions also assess the ability of a company to pay back itsloans and interest charges by analysing the retained earnings in the statementof profit or loss. The third main usergroups comprise other creditors like suppliers of inventories or capitalequipment. Creditors require financialstatements to determine the credit worthiness of a company and they alsorequire reassurance before supplying goods on credit. The objective ofassessing the capability of a firm to pay back its short-term obligations canbe achieved by investigating the current assets and current liabilities in thestatement of financial position to obtain the working capital of a firm.
However, it should not be forgotten that there are alsoother possible user groups of the financial statement that are not identifiedby the IASB. For example, the management team of a firm which might includehired professionals and the owner need financial statements to determine thefirm’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 governmentis also interested in financial statements due to taxation and regulatorypurposes. Tax agencies often analyse financial statements to determine theappropriate amount of tax payable by a company. The national governmentevaluates financial statements before implementing industrial policies to differentmarkets and financial polices like fiscal policies.
The statement of cash flowsis regularly used by regulatory authorities to ensure businesses carry outlawful business practices. In addition, trade unionrepresentatives and employees use financial statements to evaluate the profitabilityand stability of a firm. By looking at the operating profit and overheads inthe income statement, these individuals can determine the possibility of along-term employment and increase or bonuses in wages. Trade unions often viewretained earnings or cash to ensure the company is able to pay pensions, benefitsand compensation like workplace injury claims (Bragg, 2014).
In conclusion, some ofthese user groups are not recognized by the IASB because these groups might nothave any investments in the firm and thus do not have any of the shareholder’srights like ownership, voting power and entitlement of dividends (Investopedia,2018). These groups have a smaller impact on a company’s operating decisionsand direction compared to the 3 main groups.