Page 279 - DMGT104_FINANCIAL_ACCOUNTING

Unit 12: Corporate Financial Statements

6. For the Board of directors: Board of directors of an organization uses its financial statements Notes
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 financial results.
Potential competitors of an organization use its financial statements to assess how profitable
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 financial situation.

Self Assessment

State true or false:
6. The prospective equity investors and lenders use financial statements to decide whether
or not to invest in an organisation.
7. Existing Customers of an organization use its financial statements to benchmark their
own financial results.
8. Board of directors of an organization uses its financial statements to review the performance
of management in general and company in particular.
12.4 Limitation of Corporate 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 reflect 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,
3. There are items in the assets side of the balance sheet which has no real value and are
merely deferred charges to future incomes like preliminary/pre-incorporation expenses
and other,

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