Question

External users of financial statements use the information to make key business decisions. Some common users include banks, investors, suppliers, and employees. Briefly describe one reason why each stakeholder would evaluate the financial information and provide a specific example to illustrate your ideas.

Answer 1

Not only the investors of the company are concerned with the financial information of a company but also the external stakeholders like banks, suppliers and employees evaluate the company's financials statements for their decision making.

1) Banks: Generally when the companies seek for borrowings from banks, banks will analyze the financial statements of the applicant company thereby ascertaining the financials performance, Key ratios (Current ratio, Liquid ratio etc.,) and the company's repayment capacity. Thus it helps the banks as whether to sanction the loan or not.

2) Investors: Any prospective investor will look after the financials statements before investing into a company because these are the major source for ascertaining its performance and future earning opportunities.

3) Suppliers:  Suppliers also often check for the financial statements to ascertain the repayment capability of the company for the goods they supplied. And any defaults in payment by due date also can be known.

4) Employees: Employees are the internal stakeholders who contribute to the performance of the company. They are interested in the financial statements as the performance motivates them to work better and also they will get to know about the position of their company.