Using Financial Statements Effectively (Cambridge (CIE) A Level Business): Revision Note

An introduction to financial statements

• Financial statements can be used to help a business determine how successful it has been in achieving its objectives over a given period of time

• Stakeholders can use financial statements to answer a range of questions

Stakeholder use of financial accounts

• At the end of the financial year, companies must produce a set of financial statements that include two key documents

  • The statement of profit or loss shows the revenue earned, costs incurred and profit (or loss) made by the company over the previous year

  • The statement of financial position shows the assets owned, liabilities owed and net worth of the business at a particular point in time (usually the last day of the accounting period)

• These financial statements must be submitted to the relevant government agency and can usually be viewed by any interested party

• Sole traders and partnerships also commonly produce these documents in order to assess their performance

The Annual Report

• Companies compile financial statements in a larger document called the Annual Report

  • Public limited companies publish very detailed, professionally designed documents

• Along with the financial statements, the Annual Report also usually contains 

  • A letter from the chairman or board of directors as well as a statement from the CEO

  • A current profile of the company, including core objectives, recent successes and future plans

  • An overview of corporate social responsibility strategies

  • Other financial documents, such as a cash flow statement

  • Details of key personnel, including remuneration of senior managers and changes to the board of directors

  • Shares and dividends issued

  • The appointed auditor's report

Stakeholder use of the Annual Report

Limitations of the Annual Report

For investors or shareholders

• The Annual Report is outdated and backward-looking

  • It reflects past performance, often months old, which may not help investors make timely decisions

• Biased presentation

  • Information is often selected to present the business in the best possible light, possibly camouflaging financial weaknesses or risks

For employees

• The Annual Report lacks detail on job security or working conditions

  • The report doesn't reveal whether jobs are at risk, or what it’s like to work in the business

• It lacks employee perspective

  • It reflects only senior management’s view, with no insight into morale, satisfaction, or staff concerns

For suppliers

• The Annual Report provides little insight into payment reliability

  • Reports don’t show if the business pays its suppliers fairly or on time

• Unclear future demand

  • Suppliers cannot rely on the report to understand future purchasing levels or changes in sourcing strategy