Who are some of the basic users of financial
statements, and how do they use them? (Give
three in bullet form: 2-3 sentences each bullet)
3 points
+ Internal User/s - individuals inside the
company such as managers. They use financial
information for the purpose of decision-making
that can help on improving the status of the
company.
+ External User/s - individuals/organizations
outside the company such as inventors and
creditors. Investors uses financial information
to decide whether to buy, hold, and sell
ownership share of the company. Creditors on
the other hand, uses financial information to
evaluate risk of granting credit or lending
money.
+ Government - uses financial information for
tracking. They track and want to know whether
a business is paying taxes according to current
laws.
What four financial statements are contained in
most annual reports? (In bullet form: 2-3
sentences each bullet)
4 points
+ Balance Sheet - provides detailed information
about what the company owns and owes at a
fixed point in time. Balance sheet elements
includes ASSETS, LIABILITIES AND
SHAREHOLDER'S EQUITY.
+ Income Statement - reports how much money
a company made and spent over a period of
time. Income Statement usually shows the
company's net earnings and losses.
+ Cash Flow Statement - is basically a report
about the company's inflows and outflows of
cash. Cash Flow Statement is divided into 3
main components which are; (1) cash flows
from operating activities, (2) cash flows from
investing activities and (3) cash flows from
financing activities.
+ Statement of Shareholder's Equity - shows
and explains the changes in the amount of
money a company retains in a business. It
shows the shareholder's equity at the beginning
of the period, the investments made and the
net income for the accounting period. It also
shows any dividends paid to finally arrive at the
closing equity figure.
Free cash flow represents the amount of cash
generated by the business. It is the cash that
can be withdrawn from a business without
having an effect on the business' ability to
continue operating and produce future
revenue. It is also the cash flow available for the
company to repay creditors or pay dividends
and interest to investors. Investors become
more interested in free cash flow than net
income in a way that, net income is a reflection
of the accounting profit of the business and not
cash flow. Unlike net income, free cash flow is a
measure of profitability that excludes the noncash expenses of the income statement and
includes spending on equipment and assets as
well as changes in working capital from the
balance sheet.