Question

A set of financial statements includes three related accounting reports, or statements. List the names of three primary statements, and give a brief description of the accounting information contained in each.

Then, chose three important stakeholders a business can have and discuss which Financial statements and which items would they mostly be interested in and why (you may refer to ratios etc.)

Answer key:

* Balance sheet. A report showing at a specific date the financial position of the company by reporting the assets (resources) that it owns, the liabilities (debts) that it owes, and the amount of the owners' equity in the business.

* Income statement. A report indicating the profitability (or net income) of the business over a specific time period.

* Statement of cash flows. A report summarizing the cash receipts and cash payments of the business over the same time period covered by the income statement. The cash flows from three activities are presented on the statement. In order of presentation, they include: (1) operating activities; (2) investing activities; and (3) financing activities.

Important stakeholders:

Lenders

Shareholders

Employees

What they care about? Could mention ratios . 20 marks

Answer 1

Lenders

Lenders would be most concerned about their funds which they have committed with the business. They want assurance from business that their money would be returned to them on timely basis. It is very important that the funds are returned or repaid as per the agreed terms and conditions. The ratios they would be most concerned about is Debt Equity ratio, Interest service ratio, etc

Shareholders

Shareholders would be most concerned about performance of business as they have invested their funds(money) in business. If business does not operate properly and efficiently, they might not get their return on investment in the form of dividends or share value appreciation. The ratios they would be most concerned about is operating ratio, net profit ratio, gross profit ratio, sales ratio, receivable turnover ratio, etc.

Employees

Employees get their salary from business, so they are most concerned about the job security that is whether the firm would be able to pay their salary on time. They would also be concerned about long term business plans of business. Ratios employees would look forward are employee turnover ratio, etc.