From the course: Financial Accounting Part 2

Who uses financial statements?

From the course: Financial Accounting Part 2

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Who uses financial statements?

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- The key external users of financial accounting data are lenders and investors, the people who provide the capital to a business so that an entrepreneur can turn her or his dreams into reality. - But lenders and investors aren't the only external users of financial data. For example, suppliers use a company's financial statements. If I'm going to sell you on credit, then I want to know that you're going to be able to repay me. - So if you're considering entering into a long-term significant supplier relationship where you're selling on credit to another company, first thing you're going to do is get their financial statements, and do a little analysis to see if they're going to be able to pay you back. - Customers also use a company's financial statements. Anybody who enters into a long-term relationship with a business wants to know if that business is going to be around in the future. - I remember when I lived in Houston, there was a company that said, "We'll build your foundation for your house and we'll guarantee it for 50 years." Okay, that's nice. But is that foundation business going to be around for 50 years? Before I buy into that warranty, I want to look at the financial reports of that company so that I can assess their financial strength. - Employees should look at a company's financial statements as well. Employees have a long-term relationship with companies. Before leaving one job and taking another job with a different company, employees should look at the financial reports of the new company. - Is this a strong company? Do they have a strong track record? Can I count on them? Are they going to be here in the long term? Are they financially viable? - Competitors also use a company's financial statements. Do you think that Coke wants to see the financial accounting reports of Pepsi? Of course they do. Do you think that Walmart wants to see the financial accounting reports of Target? Competitors can use a company's financial statements to see its strengths and its weaknesses. - Government agencies are also users of financial accounting reports. Banks, insurance companies, and public utilities are regulated by the government. Accordingly, companies in these industries must provide financial accounting reports to the relevant government agencies. - Politicians and their staff also look at financial accounting reports. For example, if I as a politician want to make a political argument against, say, high profits in the oil and gas industry, I pull out exhibit A, their financial reports. - Or if I'm a politician who wants to protect say, the textile industry in my state, I pull out the financial reports of some major textile businesses to show that their profits are going down. - News reporters also use financial accounting reports. A basic use is to provide simple background information. For example, if I'm writing a story about Apple, I use the company's financial statements to be able to tell my readers about the company's net income. Their assets. The amount of taxes they paid. - News reporters also use financial reports to trigger investigations. Let's say a company just announced that their profits have gone down by 70%. That financial accounting report could trigger an investigation by an enterprises, and reporter who would say, "Well. Well, why did their profits go down by 70%?" - Lots of people it turns out use external financial accounting reports, investors, lenders, suppliers, customers, employees, competitors, government agencies and politicians to name a few. - And from now on, hopefully you will be in the set of people who are comfortable using financial accounting reports.

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