Stakeholders’ and Financial Statements
Stakeholders’ and Financial Statements Carol Watts Intermediate Accounting I ACC305 In today’s day and age there is no easy way of telling which companies are doing well and which are almost down in the dumps. Banks, lending facilities, and/or external stakeholders are greatly interested in seeing where companies are in the market compared to their competitors. These companies take the most risk by investing their monies into entities that are not started, maintained, or organized by themselves. There are many factors that come into play when external stakeholders are looking to make a decision on where to place their money.
Those factors include, but are not limited to, the items being sold or produced, the message the company has to offer, etc. Most importantly external stakeholders use financial information to make decisions on whether the company is profitable, has too much debt, etc. “The information provided by the financial statements help support their decisions and actions for the company. ” (Baskerville, May 2011) Basically banks, lending facilities, and/or stakeholders need to know where a company stands in the market and in profitability.
The best way for them to conclude that is by looking at companies’ Financial Statements, financial reports, and with the use of financial ratios. Before getting into detail on financial reporting and what that entails it is essential to understand who exactly those external stakeholders are. External stakeholders are composed of investors, lenders, suppliers, customers, Government agencies, competitors, labor unions, supporters and opponents, just to name a few. These are essentially people and/or companies that may have interest in what goes on with known businesses or companies.
Stakeholder’s main interest are profit growth and dividends because their goal is to get a return on the money they have invested. “Investors are stakeholders that buy shares in a company. ” (Baskerville, May 2011). Their primary interest in knowing that the company is doing well so that they can put their money into the company for a greater return. Lenders are external stakeholders who lend money to that enterprise on either a short or a long term basis usually charging a fee or interest to make some money in return.
Lenders are regularly composed of banks or other types of financial institutions. Suppliers are also interested in how a company is doing because they want to make sure that they will get paid for their products and services at a later time. Customers are stakeholders that want to know the financial strength of a company because they want to know that their supplier is going to be a dependable source. Competitors are also financial stakeholders because they have a need to know where their companies lie in the market and the only way to see that is by comparing their group to others.
Media plays an important part as external stakeholders because they “use information to publish in their mass communication outlets” (Baskerville, May 2011). Labor unions although are not interested in putting their money into a business. However, they are still interested in their well being because they use financial statements to see how much a pay increase the company can afford for upcoming negotiations and for the well being of the employees, which is why they too are considered external stakeholders.
Supporters and opponents are also considered stakeholders because they want to see evidence of their position. Financial Reports show a companies business health. It allows the viewer to see where the company stands on a financial basis. The statements most commonly used and accepted in the Accounting practice are the Income Statements, the Balance sheet, and the Statements of Cash Flows. Each financial report holds importance all on its own but is used on a collective basis to conclude whether or not to invest or place their money in that corporation.
The income statement is a report that shows historically the profit and loss of a company. This report allows shareholders and owners to see how the business has performed and if it is gaining or loosing money. This report, if compared to prior years, allows us to see if the company is maintaining itself or if it is one day up and another day down. The income statement shows revenue and expenses which gives us Net Income or Loss. Income statements show net sales, cost of goods sold, gross income, expenses which give us out net income or loss telling us which way the corporation is moving.
If an investor understands the Income statement it facilitates them to come up with a conclusion on whether it is a good or a bad idea to put their money into that entity. Balance sheets are used in determining the financial strength of a company at a specific point in time. Balance sheets “help stakeholders determine the company’s financial strength and status. ” (Baskerville, December 2010). The balance sheet shows assets, liabilities, and owner’s equity. Assets are items of value that a company owns. Liabilities are monies owed to other companies or vendors. They are basically legal claims over assets by other companies for monies owed.
Owner’s equity are claims from internal investors. The reason this report is called the balance sheet is because it is a report that final numbers are always in balance. The accounting formula used on the balance sheet is assets = liabilities + owner’s equity. This formula is known as the accounting equation. Assets and liabilities are broken down as either current or non-current to help the stakeholder get an understanding on what is expected and in what time frame these amounts are due. Statement of cash flows is also a financial report that external stakeholders use to determine what to do with a business.
The statement of cash flows is important because it details the use and sources of income of that business. This statement is broken down into three sections. These divisions are the operating section , the investing section and the financing section. Each section is important on its own because it gives details of how well a company runs on a daily basis. Operating activities section details cash generated form business activities. The investing section ‘reports information for the purchases and sales of investments and fixed assets. ’ (Thomason, n. d. ) The financing section shows the use of external funds from lenders and stakeholders.
The statement of cash flows report is very important because it shows the daily usage, which is basically how a company is run. This report is also important because low numbers can mean low sales or that their products or services have a low demand. Fewer assets compared to previous years may mean that a company had to sell their assets to raise their cash, which typically is not a good scenario. The financing section is also important because it shows if dividends were paid to the stakeholders. Essentially what stakeholders want is a return on their money because it gives a faster return on their investments.
These reports, as a whole, help determine to outside stakeholders whether a company is worth putting their money into but the reports are not the only things used. Outside stakeholders also use what is called financial ratios and create different analysis based on what they plan on accomplishing by putting their money into that business entity. There are several different risks in using financial ratios which is why “using financial ratio analysis in isolation can be problematic” (Gallagher, 2004). There are different types of ratios which determine performance, activity, solvency and leverage.
These ratios are extremely important when concluding it the entity is worth investing in. Common ratios used to determine performance is return on assets, return on equity, profit margin and earnings per share. The larger numbers each of these formulas generate the better the company is doing. These performance formulas let external stakeholders know if the firm is using its assets and investments properly. Activity ratios show how well the company’s resources are being handled by its managers. Some of these ratios include Day’s Receivables, asset turnover ratio, inventory turnover ratio, and the working capital turnover.
Just as with performance ratios the higher the ratio the better it is for the corporation and its stakeholders. These ratios are very important because it shows the companies activities on a day to day level. For example, if days’ receivable ratio generates a number over 90 then it is basically saying that the company is having a hard tome collecting its debt. Solvency and leverage ratios indicate the extended viability of the firm. These ratios consist of, but are not limited to, current ratio, acid-test ratio, debt ratio, and debt to equity ratio. Insolvency can quickly lead to bankruptcy” (Gallagher, 2004). With solvency and leverage ratios higher is not always better. For example, a debt ratio larger than one will demonstrate that the company “could not meet its financial obligation if they sold all of their assets“ (Gallagher, 2004). It is very common when looking at financial statements to automatically look to see if the business is doing well or not by just looking to see if the business had either a net income or a net loss, but that is not the only numbers that should be looked at by external stakeholders.
More often then not ratios are not the only aspects that are important for external stakeholders to look at when trying to determine if they should invest or lend their money into a certain business, it is also important sometimes to just look at the numbers on the financial statements. A good example is looking at Accounts payable. If a number in accounts payable is high then we can conclude that the entity does not generate much cash on a continued basis to pay off it vendors. Accounts receivable is also an account that is important to look at because the effect of the number demonstrates if a company is having a hard time collecting.
For example, if a company has a low balance then it is safe to conclude that they are doing well on the collections balance but if they have a high number then we can determine that it’s not collecting from its consumers. When external stakeholders try to determine if they should or should not put their money into a business or entity it is not a decision that is made easily and based on assumptions. Many factors come into play, like financial statements, ratios and comparisons. way of telling which companies are doing well and which are almost down in the dumps.
Banks, lending facilities, and/or external stakeholders are interested in seeing where companies are in the market compared to their competitors. In conclusion financial statements, ratios, and comparisons are important to look at and analyze when determining if it is a profitable company or not . When looking at financials it is important to have an understanding of what each number means and how that represents if the entity is in good or bad standing. External stakeholders are driven by the aspect of making a return on their money which is why they look at these financials and disclosure otes in debt. External stakeholder’s main point in investing their money is to make more money off of what they gave either on a short or long term basis. This can only be determined by looking at the financial reports , financial ratios, and any information the entity gives them. With all that information they are able to come up with a determination on whether the entity will make them a profit or if it will be a loss to them. References Accounting, NowMaster; Baskerville, Peter. Who are the stakeholders that use financial? Statements? Stakeholders who use financial statements – Practicing level (Internet). Version 27. Basic Accounting concepts. 2010 Dec 18 (revised 2011 May 20). Retrieved from: https://knol. google. com/k/nowmaster-accounting/who-are-the-stakeholders-that use/y2cary3n6mng/53. Accounting, NowMaster; Baskerville, Peter. How do you read and understand a Balance Sheet? : Reading and understanding a Balance Sheet AKA Statement of Financial Position – Practicing level [Internet]. Version 13. Basic accounting concepts. 2010 Dec 6 [revised 2011 May 20].
Available from: http://knol. google. com/k/nowmaster-accounting/how-do-you-read-and-understand-a/y2cary3n6mng/46. eHow. (n. d. ). The Importance of Stakeholders. Retrieved from http://www. ehow. com/info_8704286_importance-stakeholders. html eHow. Thomason, Kirk (n. d. ). How a cash flow statement can be used for Investment Decisions. Retrieved from http://www. ehow. com/info_8704286_importance-stakeholders. html Gallagher, Scott (2004) Gallagher on Financial Ratio Analysis. Retrieved from http://educ. jmu. edu/~gallagsr/ratioforman. pdf
