January 30, 2013
Decisions are made daily by company management, lenders, and shareholders. To make informed, intelligent business decisions, there are several strategies that are used by each of the fore mentioned entities. When deciding if investing is the right choice, if a company will be able to repay a loan, or what needs to happen to make a company more efficient, the best way to get an inside look at the company and the information needed, would be to look at the financial statements. By looking at the income statement, balance sheet, and the statement of cash flow, the financial health of the company can be discovered.
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An investor would be looking for the company to be making decent profits. Shareholders will also be looking for profits as well, but if the company is not making a profit, the shareholders can suggest to management to reevaluate business strategies or find ways to cut expenses. The profitability of a company is what investors, potential and current, are looking for. When the income statement doesn’t reflect a large enough profit or shows a net loss, it also affects the decisions of lenders. They may decide that the risk of the company not being able to repay a loan is too great and decline to extend credit.
Another useful statement is the balance sheet. According to Investopedia, the balance sheet is “a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time.” (Investopedia, 2013) The information provided on the balance gives investors and shareholders a picture of what the company owns and what the company owes. Included on the balance sheet are accounts such as inventory, cash, and property. The balance sheet provides a dollar amount of assets that a company has on a previous date. Assets are things that company has possession of such as cash, land, and inventory. Hence the name balance, the credits and debits should balance. The balance sheet also reports the liabilities that the company has. Liabilities would include all monies owed out by the company such as accounts payable and loans payable. The balance sheet would be looked at by management to assess the overall financial health of the company, as well as investors for the same reason. Lenders would also look at the balance sheet to determine any risk with extending credit. The balance sheet requires that each part of it must balance. In order for that to work, the company’s assets should equal their liabilities plus the shareholders’ equity. The balance sheet is basically a way for investors to get a picture of a company and its operations. The balance sheet shows a snapshot the company's accounts which include its assets, liabilities and its shareholders' equity at a certain point in time. The balance sheet gives its readers an idea of the company's financial position. It displays what the company owns and what it owes. Investors will find this statement extremely useful.