Basic Accounting

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Every business has several stakeholders. All stakeholders depend on the financial statements to provide them appropriate information for their needs. They will assume in most cases, that the financial statements are prepared in accordance with generally accepted accounting principles and that the same have been followed consistently from year to year. The Financial statements should address the information requirements of the user. Financial statement users are generally interested in the following three financial statements. The Income statement provides a picture of the profitability during a given period. The Balance sheet provides a snapshot of the financial position, assets and liabilities at a certain date. The cash flow statement shows the movement of cash in the business between any two given dates. Financial statements are the primary source of information about the company’s profitability, financial position and cash flow.

Let us now look at how the various users use the financial information. Investors need to look at profitability over time as well as comparison with industry, solvency as evidenced by the financial position and stability and continuity as evidenced by a strong cash flow. They will also be interested in the capital structure and what would contribute to the value of their holdings. The Lenders would be interested in knowing whether the company would be able to meet its cash obligations as they mature security of their loans and the company’s capacity to pay interest and repay the loan. They would also be interested in knowing whether the company is using working capital to finance long term projects? Suppliers rely on the information in the Balance sheet to determine whether to sell on credit to the company and what would be the dangers if any; Pension fund managers would look at the profitability and long term survival of the business and their stake. The Business managers are the immediate users of financial information. They have to understand how the business is doing on the financial front, spot problems that may be coming up on the horizon. An example could be inventory build-up or a receivable build-up that may lead to cash problems down the line.

Understanding financial statements and how it can fulfill specific information needs is critical for every stakeholder in the business.

Easwar has an extensive knowledge of issues related to currency,exchange,taxes,cost savings ideas and loves to write about it. For additional resources please visit http://www.improveprofitsnow.blogspot.com
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