Question

1. Give an example of how financial statements can be used internally by the managers of a company.

Answer 1

Ans: - Financial Statements helps the companies to understand the financial health of the company and is used in decision-making for the business. Financial statements are used externally and internally. External stakeholders usually use it for decision-making purposes while internally it is used by the managers to keep monitoring the financial position of the company and to manage finances.

There are three main components of the financial statements Balance sheet, the income statement, and the cash flow statement. These statements are used by financial managers in various ways of evaluating business projects and to keep tracking the financial positions of the firms.

1 Managers use these financial statements to manage the operations of their companies and to give accurate information to their stakeholders which are used by them to make an investment decision.

2 Balance tells the company's financial worth in terms of Book value. Balance sheet can be also be considered as break down of various ratios like asset turn over ratio, quick ratio, receivables turnover ratio, etc. These financial ratios information are vital to the managers and they use it in various ways to evaluate the company's performances and compare it with other similar nature of business in the industry.

3 Cash flow statements are used by the managers to understand the cash flow activities in the company over a specific time period.

4 Free cash flow (FCF) statements and other valuation statements are used by the managers or analysts to analyze the value of the company.

5 Income Statements helps the managers to analyze how much the company has earned and how much it has spent over a period of time. The income statement helps the managers to understand the efficiency of the business at various points.