Answer
Financial statements are useful for different related parties as given below:
- Importance to Management: In the words of Gerstenberg Charles W., ‘Management can measure the effectiveness of its own policies and decisions, determine the advisability of adopting new policies and procedures and document to owners the result of their managerial efforts’. For effective and controlling the company’s activities, management can get necessary data from financial statements.
- Importance to Investors: Investors are mainly interested with the safety of their investment and to earn profit from these investments with the help of financial statements. Investors create their opinion about the company before investing. For example, some factors they considered are price earning ratio, earning per share, future earning potential, trend of sales of past years, financial strength of the company etc.
- Importance to Creditors: Creditors lent their money for short period and they are keen interested in the company’s ability to repay the loan amount on time. Acreditor can compute various ratios like current ratio, quick ratio etc. to know the company’s ability to repay. If a company earns less than paid amount of interest, it is not safe to lend money to this company.
- Importance to Government: Various ratios like turnover ratios, earning ratios indicate the health of the company. To regulate various economic activities, government analyse the various ratios of companies in one industry.
- Importance to Others: Other related parties like labour, stock exchanges, economists, news agencies, trade unions etc. are interested in analysis of financial statements to know the detail position about the company and industry.
