Financial Statement Analysis: Financial information

Financial information

Financial information

Users of financial information can be classified into external users and internal users. External users of financial information are those who are not part of the operation of the business entity such as the creditors, investors, government, labor unions and the general public. Creditors are outside parties who extend credit or provide loans to the business entity. Banks, financial institutions and trade suppliers arc examples of creditors. Creditors use the financial statements of business entity in order to evaluate the credit worthiness of the business; to be assured that the business will be able to pay its maturing financial obligations on time. When a business entity applies for a loan, the banks want to make sure that the interest and principal payments will be paid as they become due. Suppliers want to make sure that they will be paid on time when they extend trade credits to customers.

Suppliers do not want to have a buildup of bad debts or uncollectible accounts receivables. Investors are outside parties who invest money into the business with the hope that they will earn money for their investments.

The stockholders of a publicly traded corporation usually evaluate the dividend payment history and the market value of the stock of the corporation, in addition to the overall environment where the business operates before buying the stock of a particular corporation. The information used in the evaluation made by potential investor stockholders is obtained from the financial statements of the corporation. The government is a user of the financial information because taxes collected are based on the financial statements that the business entity files with government agencies, such as the Internal Revenue Service (IRS).

Labor unions are interested in the financial condition of a business in order to assess if the business can afford improvements in wages and fringe benefits that it will propose during labor-management bargaining negotiations. It is impractical for labor unions to ask for wage and benefit improvements that the business entity cannot afford. The general public is a user of the financial information. Sometimes, law suits are filed against business entities and the financial statements can show the financial capability of the business to pay the amount of damages and legal claims filed against it.

Internal users of financial information are those who are part of the operation of the business. Management uses various financial reports, in addition to the financial statements in order to evaluate its operational performance and to address specific and potential areas in its operations that require management action. At the same time, management wants to see if its strategic plans can be supported financially by the business. Some expansion programs, for instance, penetrating the international market, opening new plants, rehabilitating old plant facilities, etc. require a big amount of financial resources and management must be able to make a decision based on the financial information available. Management also makes decisions with respect to salary and benefits improvements, negotiations with labor unions and therefore it must be knowledgeable about its financial ability and capability to satisfy many of its commitments. A well-informed management team is in a better position to make sound decisions in all aspect of the business operations. Employees are also internal users of financial information. Employees want to work for business entities that will not go bankrupt. Employees do not want to be casualties of retrenchment programs resulting from cost reduction measures implemented by businesses.

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