WHAT IS THE PURPOSE OF FINANCIAL STATEMENT AND WHO USES FINANCIAL STATEMENTS?

Here is a brief list of who uses financial statements and why. This list gives only a few examples and is by no means complete.

1. Existing equity investors and lenders, to monitor their investments and to evaluate the performance of management.

2. Prospective equity investors and lenders, to decide whether or not to invest.

3. Investment analysts, money managers, and stockbrokers, to make buy/sell/hold recommendations to their clients.

4. Rating agencies (such as Moody’s, Standard & Poor’s, and Dun & Bradstreet), to assign credit ratings.

5. Major customers and suppliers, to evaluate the financial strength and staying power of the company as a dependable resource for their business.

6. Labor unions, to gauge how much of a pay increase a company is able to afford in upcoming labor negotiations.

7. Boards of directors, to review the performance of management.

8. Management, to assess its own performance.

9. Corporate raiders, to seek hidden value in companies with underpriced stock.

10. Competitors, to benchmark their own financial results.

11. Potential competitors, to assess how profitable it may be to enter an industry.

12. Government agencies responsible for taxing, regulating, or investigating the company.

13. Politicians, lobbyists, issue groups, consumer advocates, environmentalists, think tanks, foundations, media reporters, and others who are supporting or opposing any particular public issue the company’s actions affect.

14. Actual or potential joint venture partners, franchisors or franchisees, and other business interests who need to know about the company and its financial situation.

This brief list shows how many people and institutions use financial statements for a large variety of business purposes and suggests how essential the ability to understand and analyze financial statements is to success in the business world.