3.5.1 Interpretation Of Financial Statements

Question 1

different stakeholders will have different interests and will therefore be interested in different parts of financial statements

Answer 1

-

Question 2

what 2 financial statements do limited liability companies have to produce by law

Answer 2

1 statement of financial position (balance sheet)
2 statement of comprehensive income (profit and loss account)

Question 3

why would each stakeholder be interested in a statement of financial position (balance sheet)

Answer 3

• shareholders, want to see solvency (ability to pay debts) and liquidity
• managers and directors, helps them monitor working capital levels ensuring they have enough cash to pay current liabilities
• suppliers, if a business has a low amount of working capital they are unlikely to offer them long credit periods as there is a high chance they would never get paid
• loan providers, look at firm’s ability to pay back the loan with interest to decide the risk of lending

Question 4

why would each stakeholder be interested in a statement of comprehensive income (profit and loss account)

Answer 4

• shareholders, want to see profitability for dividends
• managers and directors, will keep an eye on revenue and costs maybe comparing statements between departments
• employees, can see job security or potential for a pay rise or bonus
• suppliers, will see if a business is going to be reliable with payments
• loan providers, unwilling to invest in businesses with low operating profit