Question

how are financial reports useful to external decision makers when allocating scarce resources?

Answer 1

Financial reports are the most reliable source of information to have a complete overview on the operational efficiency and profitability of a company . As such , when evaluating a n investment proposal or a funding idea , external stakeholders use it as a basis for making investment decisions in the company. All the 4 financial statements hence are a major source of information to the external shareholders in the following ways

No	Scarce resource allocation	Description
1	For investors deciding allocation of funds.	· Financial statements provide to the investors about the aggressive or the moderate performance of the companies . · Depending on the risk appetite of the investors, an investor may choose to allocate his scarce resources based upon these statements
2	For banks and FI in determining fund approvals in capital structure of company	Banks and FI look upon the present capital structure to look into the present Debt levels of the company , before allowing further debt funding’s into the company . As such decision making regarding the scarce debt funds to be allocating in which sector of the industry becomes easier
3	For Govt in deciding taxation and tax exemptions allowed	Govt uses this statement’s in deciding which priority sectors in the economy to be exempted from tax , the forecasted level of taxations on the future earnings based on the financial statements
4	For Stakeholders in threshold –ing their credit terms and credit supplies	External stakeholders allow credit period depending on the goodwill and the ability of the company to pay back . As such these steamtents provide a clear picture to the creditors in determining their level of credit allowance to particular company
5	For Sustainability investors in ESG investing	For ESG investors , company sustainability investing and practices help in decding the weights in ESG allocation of funds
6	For Capital Market regulators (SEC) allowing fundraising .	Capital market regulators allows companies to raise only a specific portion of capital from the open market based on their previous quarterly reporting’s .

Thanks .