Companies create and distribute financial statements each period. These basic financial statements include the income statement, the balance sheet, the statement of cash flows and the statement of stockholders equity. Managers, investors, creditors and employees use these financial statements to consider the financial health of the company and make future decisions. Each financial statement user considers different aspects of the financial statements based on their individual perspective.
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Managers use financial statements to evaluate the performance of the company. On the income statement, management compares sales and expenses from one period to the previous period to identify potential problem areas. Big changes require management to investigate and learn what caused the change. On the balance sheet, management considers the change in liabilities and in assets from one period to the next. Management needs to explain the reason for large changes and determine if those changes helped the business or resulted from problems.
Investors use financial statements to review the return on their funds. Investors provide funds to companies in exchange for shares of stock. They want to see the stock value increase while they hold the shares to increase the value of their investment. Investors review the income statement to see how profitable the company performed. They also review the statement of stockholders equity to review changes in the company's shares outstanding.
Creditors use financial statements to make lending decisions to companies. They look at the income statement, the balance sheet and the statement of cash flows. The income statement communicates how much income the company generated during the period. The balance sheet tells the creditor how its liabilities compare to its equity. Companies with high liabilities already owe a considerable amount of money, impacting the creditor's decision. The statement of cash flows communicates the company's ability to manage its cash, which it needs to meet financial obligations.
Employees look at the income statement for several reasons. Some employees maintain responsibility for managing certain expenses reported on the income statement. Some companies pay bonuses to employees based on the company's net income, which is also reported on the income statement. Employees also look at the statement of cash flows to determine if the company manages its cash well enough to continue meeting payroll obligations.
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