How to Read a Financial Report: Wringing Vital Signs Out of the Numbers

Chapter 19. ACCOUNTING AND FINANCIAL REPORTING STANDARDS

Importance of Financial Reports

Millions of persons depend on financial reports for vital information about businesses. This sweeping congregation of financial report users includes bankers deciding whether to make loans to businesses; investors deciding whether to buy, hold, or sell stocks and debt securities of public corporations; buyers and sellers of private businesses deciding on the value of the company; owners of closely held businesses evaluating how their ven tures are doing; suppliers deciding whether to sell to businesses on credit; and pension fund managers carrying out their fiduciary responsibility that requires due diligence in managing other people's money.

And let's not forget business managers themselves. Managers are the first and most immediate users of accounting information and financial statements. Managers depend on accounting reports to track their profit (or loss) performance. Managers need balance sheet and cash flow information to keep their financial condition under control, to spot any solvency problems that may be developing, and to plan for the capital requirements of the business. Managing the financial affairs of a business would be impossible without financial statements.

It goes without saying that financial statements and the accompanying disclosures should meet the information needs of users. Different readers focus on different information in financial reports. Financial statement users ...