Financial statements are very useful internally for a company's stockholders and to its board of directors, its managers and some employees, including labor unions. Externally, they are important to prospective investors, to government agencies responsible for taxing and regulating, to lenders such as banks and credit rating agencies, and to investment analysts and stockbrokers Costales, S. B., (1979). They are especially useful to managers, investors and creditors.
For equity investors operating income and growth are of primary concern in relation to income operation of the company. Investors bank on cash flow statements which give them a Fairview of company position in terms of sufficient cash to pay out the dividends. The potential core business of investors is to value the balance sheet and estimate whether it’s in a healthy position. Also before investors commit their funds they must look at the company performance record in order to assess the risk return trade off of their funds. Investors also need to know how the company will grow their funds to future healthy earnings.
The creditor are very crucial to any company regardless of the financial condition the company is, therefore their position should not be ignored at all cost. They mainly concerned with the ability of prospective borrower to repay the borrowed funds with an interest and principal amount. The creditors also need to be notified about the capital structure of the company as this enables one to make informed decision regarding the use and management of borrowed funds. The capital structure also highlights the outstanding debts in company and how the companies have serviced such debts in the past. The creditors also need to know the source of debt repayment and much of all are the operations of the company generating sufficient income.
Employees look at financial statements for several reasons, some employees maintain the responsibility for managing certain expenses reported on financial statement. Some companies pay employees bonuses based on company net income. Some employees look at statement of cash flows to determine if company manages it cash well to meet and continue it payroll obligations
Managers use financial statements to evaluate the performance of the company. On the income statement, management compares sales and expenses from one period to previous period to identify potential problems areas. Big variance requires management to investigate and learn what led to such changes. On the balance sheet, management considers the change in liabilities and in asset from one period to the next. Management needs to explain the reason for such large changes and determine those changes helped the business or resulted from problems. Management relies on financial statements to determine the profit margin of the company and adjust prices where necessary.