Learn how to understand Financial Statement of a company (with examples)

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AAHAcademy
Finance Management Course
AllAssignmentHelp Academy
  • 12 lessons
  • 6 quizzes
  • 1 week duration

1.1 What is a Financial Statement?

 

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Financial statements are combination of four summarized financial record of a company. These four records are:

  • The Balance Sheet
  • The Income Statement
  • The Statement of Cash Flows
  • The Statement of Shareholders’ Equity

These summarized records help all the stakeholders of the company know the current financial position of the company.

The stakeholders are the individual or entity who have direct or indirect interest in the company.

I have listed below some of the stakeholders who uses financial statements:

Management of the company

Management makes operational and financial decisions for the company. They use financial statement to know the current cash flow, profit, and available liquidity.

Cash flow
It is the amount of money received or spent during a particular period.

Profits
It is the amount of money remaining with the company after removing all the expenses.

Liquidity
It is the ability of a company to pay its liabilities.

Liabilities
They are the obligations that the company needs to pay to others (individuals or entities).

Shareholders

Shareholders are those who hold shares in the company. They are also called investors. They invest money in the company to earn dividends or for capital growth. They use financial statement to know whether company is performing well. It helps them decide if the company is worthy enough to keep the money invested.

Shares
A small part of a company. Company divides its capital into several equal parts. Investors put money in the company and become owner of that part till they do not take their money out.

Investors
Anyone who invests her money in any form (share, debentures, etc.) in a company.

Dividends
A sum of money paid to investors (generally every year) from the earned profits

Employees

Financial statements help employees understand the business where they are working. No one wants to work in a dying company. So it is a good indicator that whether a particular employee should work or leave for a strong company.

Customers

These are not the end consumers. You can call them intermediary consumers who are interested in the financial statement of a company. They can be the companies who make bulk purchases for longer period through contracts. They use financial statement to know whether the company can fulfil its contract.

Governments

Government assesses financial statement to know whether the company has paid correct taxes.

Investment Analysts

Investment analysts uses the financial statements to analyze investment opportunities. They want to know whether investors can invest their money in the company.

Competitors

They are the most interested party who wants to know the health of those who are in the battle. The financial strength of a company decides what possible actions it can take in the market. Therefore, competitors use the financial statement.

Lenders

Lenders assess the ability of the company to repay the money (principle and interests). Lenders would not want to lend their money to a company who is not faring well financially.

Suppliers

They use financial statement to know if they can give supplies on credit.

Unions

Unions use financial statement to know whether the company can pay compensation and benefits to the workers.

Rating Agencies

Credit rating agencies uses financial statement to give rating to the company. Rating shows the health of a company and an indicator for the investors for investing decisions.