Introducing Financial Statements
Financial statements are used to understand key facts about the performance and disposition of a business and may influence decisions.
LEARNING OBJECTIVE
Explain how financial statements are used by different entities
KEY POINTS
- Owners and managers use financial statements to make important long-term business decisions. For example: whether or not to continue or discontinue part of its business, to make or purchase certain materials, or to acquire or rent/lease certain equipment in the production of its goods.
- Prospective investors use financial statements to perform financial analysis, which is a key component in making investment decisions.
- A lending institution will examine the financial health of a person or organization and use the financial statement to decide whether or not to lend funds.
TERM
- financial analysis
Financial analysis (also referred to as financial statement analysis) refers to an assessment of the viability, stability, and profitability of an organization or project.
Uses of a Financial Statement
Financial Statements are used for a Multitude of Different Purposes. Readers of a financial statement are seeking to understand key facts about the performance and disposition of a business. They make decisions about the business based on their reading of the statements. Because financial statements are widely relied upon, they must be straightforward to read and understand.
For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and explanation of financial policies and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement, and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.
Owners and managers frequently use financial statements to make important business decisions, for example:
- Whether or not to continue or discontinue part of the business.
- Whether to make or to purchase certain materials.
- Whether to acquire or to rent/lease certain equipment in the production of goods.
The documents are also helpful in making long-term decisions and as a source of historical records .
| FY 2011 Revenue by source (in $ Millions) | ||
| Dollars | Percent | |
| Enlisted Fines and Forfeitures | 36.6 | 57% |
| Resident Fees | 12.4 | 19% |
| Sales & Leases | 0.7 | 1% |
| Enlisted Payroll Contributions 0.50 cts | 7.4 | 12% |
| Interest Income from Trust | 6.8 | 11% |
| $64,000,000 | 100% |
Budget: One of the uses of financial statements is as a budgeting tool, as in this example.
Other individuals and entities use financial statements too. For example:
- Prospective investors use financial statements to perform financial analysis, which is a key component in making investment decisions.
- A lending institution will examine the financial health of a person or organization and use the financial statement to decide whether or not to lend funds.
- Philanthropies may use financial statements of a non-profit as a component in determining where to donate funds.
- Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.
- Vendors who extend credit may use financial statements to assess the creditworthiness of the business.
- Employees also may use reports in making collective bargaining agreements