The financial statements of an entity are not only prepared for internal users but also for external stakeholders. It is important to understand the needs of these stakeholders so that the financial statements can be prepared in accordance with those needs. Let us understand the crucial external users that matter.
External and Internal Stakeholders of Financial Statements
Following are some of the interested stakeholders of financial information of any firm:
Having invested their earnings in the firm, the main interest of owners in financial statements is to assess the returns on their investment and how prosperous do they appear for the future. Owners generally have access to all financial records and files.
Browse more Topics under Financial Statements
- An Introduction to Financial Statements
- Distinction between Capital Revenue and Capital Expenditure
- Operating Profit
- Trading and Profit and Loss Account
- Balance Sheet and Opening Entry
- Depreciation, Bad Debts and Provision for Bad and Doubtful Debts
- Need for Adjustment, Closing Stock and Outstanding Expenses
- Prepaid Expenses, Accrued Income and Income Received in Advanced
- Provision for Discount on Debtors, Managers Commission and Interest on Capital
- Manufacturing Account
The management team of a business needs to understand the profitability, liquidity, and cash flows of the organization each month, so that it can make operational and financing decisions about the business. Management will also have access to all records.
Firms which are in competition against a business will attempt to gain access to the rival’s financial statements, in order to evaluate their financial position. This could be used to craft necessary competitive strategies.
Customers of the business
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.
A company may elect to provide its financial statements to employees, along with a detailed explanation of what the documents contain. This helps increase the level of employee involvement in and understanding of the business.
A government in whose authority a company is located would request the financial statements in order to determine whether the business is paying the right amount of taxes and relevant laws are being adhered to.
Outside analysts want to see financial statements in order to decide whether they should recommend the company’s securities to their clients. Auditors will also need to analyse financial records.
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.
Suppliers will require financial statements in order to decide whether it is safe to extend credit to a company.
A union requires the financial statements of a business in order to evaluate the ability of a business to pay the due compensation to the union members that it represents.
There may even be other users of financial statements than the above mentioned. There are many advantages of studying the financial statement for these parties. They can rely upon the information contained in such financial statements and to act upon that information as desired.
Solved Question for You
Q: In cases of arbitration, do financial statements come in any use?
Answer: Even in the cases of an arbitration, the audited financial statements of a company can come to be very useful as they provide a base for the management or a third party to make a stand.