Internal users of financial statements use the information to make key business decisions. Some common users include managers, employees, internal accountants, and executives. Briefly describe one reason why one of these stakeholders would evaluate the financial information and provide at least one example to illustrate your ideas. You must provide a minimum of 1 scholarly resource to support your rationale. Participate in follow-up discussion by providing additional reasons and examples that have not already been listed related to the stakeholders’’ evaluation of financial statements.
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One of the key aspects of evaluating financial information is the understanding of its relevance to internal users. Internal stakeholders, such as managers, employees, internal accountants, and executives, heavily rely on financial statements to make informed decisions about the business. This response will discuss why one internal stakeholder, managers, evaluate financial information and provide an example to support the rationale. Additionally, it will present additional reasons and examples related to the evaluation of financial statements by different internal stakeholders.
Managers have a critical role in an organization as they are responsible for guiding and making important decisions for the company’s operations and strategic direction. One reason why managers evaluate financial information is to assess the financial performance and profitability of the company. By reviewing financial statements, such as income statements, balance sheets, and cash flow statements, managers can gain insights into the company’s financial health, identify any financial issues or trends, and make necessary adjustments to enhance the overall performance.
For example, a manager may evaluate the company’s income statement to examine the revenue generated and the associated expenses incurred during a specific period. This analysis allows them to assess the company’s profitability by calculating key metrics like gross profit margin, operating margin, or net profit margin. If the manager identifies a decline in profitability, they can investigate the reasons behind it, such as increasing costs or declining sales, and take appropriate measures to improve the financial performance. This may include implementing cost-cutting measures, exploring new revenue streams, or optimizing operational efficiency.
Jones, S. E., & Harrell, S. S. (2019). The role of management in financial statements and reports: Potential areas of concern. Journal of Management Development, 38(1), 3-12.
Additional reasons and examples related to stakeholders’ evaluation of financial statements:
1. Employees: Employees evaluate financial information to assess the financial stability and sustainability of the company. For instance, employees may analyze the company’s balance sheet to understand its liquidity position and determine the organization’s ability to meet its financial obligations. This information can influence their decisions regarding job security, salary negotiations, or overall satisfaction with the company.
2. Internal Accountants: Internal accountants evaluate financial information to ensure accuracy and compliance with accounting principles and regulations. They use financial statements as a basis for preparing management reports, conducting audits, and identifying any financial irregularities. Their evaluation helps maintain the integrity of financial information and supports the organization’s financial controls.
3. Executives: Executives, such as CEOs and CFOs, evaluate financial information to make strategic decisions and set financial goals for the organization. By analyzing financial statements, they can assess the company’s financial position, evaluate investment opportunities, and allocate resources effectively. For example, executives may review cash flow statements to determine the organization’s ability to finance new projects or invest in research and development.
Overall, the evaluation of financial statements by internal stakeholders is crucial for informed decision-making, ensuring financial stability, maintaining compliance, and driving the organization’s strategic direction.