Finance theory

Interpreting financial information

Business accounts are produced to meet the needs of their users. Typical users and the use they make of accounts is shown below:
Shareholders -to check on quality of direction of company, as well as profitability, solvency, value of company and other signs of health.
Employees - to check on job security and scope for wage and benefit increases.
Suppliers - to check that a company is generating the cash to be able to pay up.
Inland Revenue - for calculations of Corporation tax.
There are three main financial statements that are produced by company accountants. These are:
1. The Balance Sheet setting out the financial position of the company at a particular moment in time e.g. the year end.
2. The Profit and Loss Account showing how the profit or loss of the business has been generated.
3. A cash flow statement setting out the cash inflows and outflows to the business during a particular period of time