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Unit 2: Understanding Corporate Financial Statements

4. For Customers and Suppliers: Major customers of and suppliers to an organization evaluate Notes
the financial strength and staying power of the company as a dependable resource for their

business. For this purpose, the best possible aids are those of the financial statements of the
organization.
5. For Labor Unions: Labor unions use financial statements of a company to gauge how much

of a pay increase a company is able to afford in upcoming labor negotiations.
6. For the Board of Directors: Board of directors of an organization uses its fi nancial statements
to review the performance of management in general and company in particular.
7. For Managers: Managers, too, are interested in measuring the operating performance in terms
of profitability and return on invested capital. If they are not owners, managers must still

satisfy the owners’ expectations in this regard. As managers, they are interested in measures
of operating efficiency, asset turnover, and liquidity or solvency. These will help them

manage day-to-day activities and evaluate potential credit customers and key suppliers.

8. For Competitors: Existing Competitors of an organization use its financial statements to
benchmark their own fi nancial results.
Potential competitors of an organization use its financial statements to assess how profi table

it may be to enter the industry.

9. For Government Agencies: The financial statements of a company are very useful for the
government agencies responsible for taxing, regulating, or investigating the company.

10. For Associated Personnel: The financial statements of a company are also useful for
politicians, lobbyists, issue groups, consumer advocates, environmentalists, think tanks,
foundations, media reporters, and others who are supporting or opposing any particular
public issue the company’s actions affect.

11. For Partners: The financial statements of a company are used by actual or potential joint
venture partners, franchisors or franchisees, and other business interests who need to know
about the company and its fi nancial situation.

Self Assessment

State whether the following statements are true or false:

11. The prospective equity investors and lenders use financial statements to decide whether or
not to invest in an organisation.

12. Existing Customers of an organization use its financial statements to benchmark their own
fi nancial results.
13. Board of directors of an organization uses its financial statements to review the performance

of management in general and company in particular.
2.4 Limitations of Financial Statements

Some of the limitations of the financial statements are as follows:
1. As the historical costs and money measurement concepts govern the preparation of the
balance sheet and income statements, hence these financial statements are essentially

statements reflecting historical facts. It ignore inflationary trend and does not refl ect the

true current worth of the enterprise,

2. Certain important qualitative elements are omitted from the financial statements because
they are incapable of being measured in monetary terms like the quality and reputation of
the management team, employee and other,

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