Question

Do you think that you can prepare a single set of financial statements that is reasonably suitable for all major external users and their needs? Explain.

Answer 1

The question says "set of financial statements" thus it can include all the statements that an external user needs for proper decision making.

The set of financial statements, and their uses, that are provided to external users are as follows

1. Balance Sheet or the statement of affairs of the company: The balance sheet of the company provides a detail picture of position of the company. The statements are duely audited, thus ensures true and fair view, and deviations if any are reported in the Auditor's Report.

2. Profit and Loss account or The Income Statement: The income statement of the company presents the summary of the revenue transactions carried out by the entity throughout the year. Thus is helps to ascertain whether the company is earning adequate profit or not, and what are it's heads of expenditure.

3. Cash Flow Statements: The above mentioned statements are totally prepared on accrual basis, thus doesn't accurately inform the flow of cash in and out of the entity. But Cash Flow Statement comes to the rescue. It is a summaried form of all the transactions of Cash and Cash Equivalents that took place during the year. It helps to track the flow of cash in and out of the company.

Thus these 3 satements provide adequate information for sound decision making by external users and hence these set of financial statements are reasonably suitable for all major external users.

But these statements are sometimes subject to window dressing, which creates a doubt on the reliabilty of the above mentioned statements. Also the quality of management cannot be ascertained using those statements.

Thus the set of financial statements are reasonably suitable, but not conclusive proof.