Using Financial Statements Effectively (CIE A Level Business)

• Financial statements can be used to help a business determine how successful it has been in achieving its objectives over a given period of time
  
  
• In particular, stakeholders can use financial statements to answer a range of questions

Diagram: Stakeholder use of Financial Accounts

Financial accounts can help stakeholders answer a range of questions

• At the end of the financial year, companies must produce a set of financial statements that include two key documents
  • The statement of profit or loss shows the revenue earned, costs incurred and profit (or loss) made by the company over the previous year
  • The statement of financial position shows the assets owned, liabilities owed and net worth of the business at a particular point in time (usually the last day of the accounting period)
     
• These financial statements must be submitted to the relevant government agency and can usually be viewed by any interested party
   
• Sole traders and partnerships also commonly produce these documents in order to assess their performance

• Companies compile financial statements in a larger document called the Annual Report
  
  • Public limited companies publish very detailed, professionally designed documents
    
    
• Along with the financial statements, the Annual Report also usually contains 
  • A letter from the chairman or board of directors as well as a statement from the CEO
  • A current profile of the company, including core objectives, recent successes and future plans
  • An overview of corporate social responsibility strategies
  • Other financial documents, such as a cash flow statement
  • Details of key personnel, including remuneration of senior managers and changes to the board of directors
  • Shares and dividends issued
  • The appointed auditor's report
    
    
• The Annual Report is useful to the business and its stakeholders in several ways

Stakeholder	Use of the Annual Report
Directors & Managers	Assess business performance over a specific period of time Compare performance to previous periods Budgeting and target-setting for departments and individuals Supporting strategic decision-making
Employees	Determining the stability of the business to establish whether their jobs are secure Discovering future business plans to support their career decisions Supporting a claim for increased pay
Shareholders	Assess the return on their investment in the company Assess business performance to determine potential for continued investment Understand the level of dividend they will receive
Government	Determine the amount of tax a company is required to pay Assess business stability to determine its ability to continue to employ workers Ensure that legal requirements are met in the compilation of accounts
Suppliers	Assess the the liquidity of a company to determine whether it is able to pay for goods it orders Determine whether the company is creditworthy
Local Community	Assess business stability to determine its ability to continue to employ workers Investigate the company's commitment to locally-relevant aspects of corporate social responsibility, such as minimising pollution