Using Financial Statements Effectively (Cambridge (CIE) A Level Business)

An Introduction to Financial Statements

• Financial statements can be used to help a business determine how successful it has been in achieving its objectives over a given period of time
  

• In particular, stakeholders can use financial statements to answer a range of questions

Diagram: Stakeholder use of Financial Accounts

Financial accounts can help stakeholders answer a range of questions

• At the end of the financial year, companies must produce a set of financial statements that include two key documents

  • The statement of profit or loss shows the revenue earned, costs incurred and profit (or loss) made by the company over the previous year

  • The statement of financial position shows the assets owned, liabilities owed and net worth of the business at a particular point in time (usually the last day of the accounting period)
     

• These financial statements must be submitted to the relevant government agency and can usually be viewed by any interested party
   

• Sole traders and partnerships also commonly produce these documents in order to assess their performance

The Annual Report

• Companies compile financial statements in a larger document called the Annual Report
  

  • Public limited companies publish very detailed, professionally designed documents
    

• Along with the financial statements, the Annual Report also usually contains 

  • A letter from the chairman or board of directors as well as a statement from the CEO

  • A current profile of the company, including core objectives, recent successes and future plans

  • An overview of corporate social responsibility strategies

  • Other financial documents, such as a cash flow statement

  • Details of key personnel, including remuneration of senior managers and changes to the board of directors

  • Shares and dividends issued

  • The appointed auditor's report
    

• The Annual Report is useful to the business and its stakeholders in several ways