Question

Details of the assessment question: Financial statement analysis refers to an examination of the viability, stability and profitability of a business enterprise as a whole or a particular project that it has undertaken. It is performed by expert professionals who prepare reports using the information taken from the company’s financial statements. According to the statement above, the financial statements become the main work for Financial statement analysis Prepare a essay 500 word to cover the following: 1- Who are the main users for Accounting Information-? 2- What are the Components of a financial statement?

Answer 1

Main users for Accounting Information

Internal Users:

• Management

Management uses Accounting Information for taking decisions like Capital budgeting, Financial Planning, Product portfolio management, introduction of new products, Cash management , Make or buy decisions etc. The accounting for management decisions is called Management Accounting

• Employees and their Unions

They use these information to decide whether tojoin the company or to leave for a better employer. They also use it for collective bargaining on increase in wages

External Users:

• Shareholders

Shareholders use the accounting information to make management accountable for the performance

• Investors

Investors use accounting information to make investment decisions to buy or sell the shares

• Creditors and lenders

Creditors and lenders use accounting information to take decision on lending and terms of lending

• Government

Government uses accounting information for tax purpose and for policy decisions

Components of a financial statement

Financial statement has mainly three components:

• Income Statement or Profit and Loss Account:

Income or Profit and loss Statement measures the performance of a companyduring the period. This statement isfor a period. It measures the amount of flows(Revenue, Expense and income) in a given time period

• Balance Sheet

The Income statement is for a period ,whereas Balance Sheet is for a given time. It is always as on a certain date. It gives theFinancial State of affairs of a companyon a given date .It gives the assets, liabilities and shareholders’ equity on a given date (end of the period for which Income Statement is prepared)

• Cash Flow Statement

A company may have made income and also may have assets as per balance sheet. But , it may still have problem of cashflow , if the company is not managed properly. If there is only credit sales and inadequate collection from customers, there will be cash flow problems for the company, not revealed by Income Statement or Balance Sheet.

Hence a third Statement , called “Cash Flow Statement” is prepared to reveal the status of cash flows .

The three Statements together reveal the efficiency and effectiveness of operations and true and fair view of financial state of affairs of the company