Financial Statement Analysis, BBA 7th Semester

Lecture No. 7
PARTIES INTERESTED IN FINANCIAL STATEMENTS

Analysis of financial statements has become very significant due to widespread

interest of various parties in the financial results of a business unit. The various
parties interested in the analysis of financial statements are :

Investors:
Shareholders or proprietors of the business are interested in the well being of the
business. They like to know the earning capacity of the business and its prospects
of future growth.

Management:
The management is interested in the financial position and performance of the
enterprise as a whole and of its various divisions. It helps them in preparing
budgets and assessing the performance of various departmental heads.

Trade unions:
They are interested in financial statements for negotiating the wages or salaries
or bonus agreement with the management.

Lenders:
Lenders to the business like debenture holders, suppliers of loans and lease are
interested to know short term as well as long term solvency position of the
entity.

Suppliers and trade creditors:

The suppliers and other creditors are interested to know about the solvency of
the business i.e. the ability of the company to meet the debts as and when they
fall due.

Tax authorities:
Tax authorities are interested in financial statements for determining the tax
liability.

Researchers:
They are interested in financial statements in undertaking research work in
business affairs and practices.
Employees:
They are interested to know the growth of profit. As a result of which they can
demand better remuneration and congenial working environment.
Government and their agencies:

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Financial Statement Analysis, BBA 7th Semester

Government and their agencies need financial information to regulate the

activities of the enterprises/industries and determine taxation policy. They
suggest measures to formulate policies and regulations.

Stock exchange:
The stock exchange members take interest in financial statements for the purpose
of analysis because they provide useful financial information about companies.

Limitations of Financial Statements:

Financial Statements assume constant real-value of money. It should be noted
that net income is not absolutely accurate and precise, since assumptions,
estimations & approximations are involved as regards estimated useful life of
plant assets, their residual value etc. Events not measurable objectively are not
reflected in Income Statement. Also the Financial Statements give no “valuation”
as such of the enterprise because assets are valued on “going-concern
assumption”, and the fixed assets are valued at Book Value which may be more
or less than realizable market value.
Financial Statements have the limitation that assessment of future profitability is
not possible by reading these. Future profitability depends on a number of
factors e.g. quality of products, activities of competitors, general economic
situation etc., a picture of which cannot emerge from financial statements.
Financial Statements thus give limited picture of an enterprise in monetary
terms, without taking into account outside non-monetary factors. One other
limitation of Financial Statements is that information is not available in
Financial statements about employees’ relations with management,
morale/efficiency of employees, reputation/public perception of the enterprise,
effectiveness of management team and potential exposure
to regulatory changes. These impact operational results but are difficult to
quantify from Financial Statements.
Different accounting practices can distort comparisons. As noted earlier,
inventory valuation and depreciation methods can affect financial statements
and thus distort comparisons among firms. Also, if one firm leases a substantial
amount of its productive equipment, its assets may appear low relative to sales
because leased assets often do not appear on the balance sheet, at the same time,
the liability associated with the lease obligation may not be shown as a debt.
Therefore leasing can artificially improve both the turnover and the debt ratios.

Limitation # 1
Assets on the balance sheet are always shown at the original purchase price
(historical cost) even though the current value may be different.

Limitation # 2

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Financial Statement Analysis, BBA 7th Semester

Some figures on the financial statements are based on subjective estimates and
assumptions. Management could possibly change net income by changing these
estimates. Depreciation is one example where estimates and assumptions are
used.

Limitation # 3
There are certain other items which are not reported in the balance sheet even
though the firm may consider them to be of considerable value.
Examples
Image/reputation of the firm
The value of its human resources (people)

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