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. TheBalance Sheet setting out the financial position of the company at a particular moment in time e.g. the year end.
2. TheProfit and Loss Account showing how the profit or loss of the business has been generated.
3. Acash flow statement setting out the cash inflows and outflows to the business during a particular period of time