FINANCIAL REPORTS AND DECISION MAKING

FINANCIAL REPORTS AND DECISION MAKING

Financial Reports

The accounts or the finance department regularly prepare and share financial reports such as annual financial statements, cash flow statements, credit statements, profit, and loss statements. The various groups in the organization and outside the business have diverse information requirements regarding the financial reports. The financial reports provide rich information to all the users in the organization to help them make crucial business decisions regarding their relationship with the company. This research aims to discuss the different users of the financial reports, the information included in financial statements, and it can help the users in making strategic decisions. Besides, the report will critically analyze the use of financial statements in the decision-making process, such as the purchase of company shares.

Users of financial reports and the Information Requirements

The users of financial statements are divided into two groups. The first group consists of the founders, shareholders, creditors, investors, consumers, suppliers, legislative bodies, security exchanges, trade unions,  government, information agencies and production, and trade association (Osadchy et al., 2018, p. 339-350). The external users of the financial reports use the information provided for different purposes. The shareholders, founders, and investors require the financial information to ascertain the increase or decrease in the share prices. Besides, the information on the efficient use of the company resources will be necessary to establish the company’s efficiency and making investments in the company (Kawugana & Faruna, 2019, p. 87-99). The annual reports and the cash flow statement will provide the essential information required by this group. The consumers will need the financial statements information on the various environmental policies the company implements. Also, they will need information on the company’s business relationships and the capability to provide quality goods.

The government requires the information in the financial reports to help in taxing the company and ensure the company is complying with the various tax systems of a state. Moreover, the legislative bodies and lawyers require financial information to provide the company is complying with various contractual agreements. Also, the lawyers will ensure the company is complying with the law on paying dividends and calculating profit and loss. Internal users are the other group of financial report users. It comprises executive management for managerial decision-making processes. Besides, the departmental managers use the reports for evaluation of resource requirements, capital structure effectiveness, investment decision correctness. The employees require the information for evaluating the current and future employment opportunities, and for negotiating salaries and remunerations.

Information within the Financial Reports and How the Users Use the Information in Making Investment Decisions.

The information found in the financial reports includes capital structure, assets, liabilities, the price per share capital, taxation, profit, market share, operation efficiencies, net income, liquidity, and solvency.  Other information comprises forecasted returns, actual returns, return on capital invested, equity (Amel-Zadeh, & Serafeim, 2018)). The external and internal users can find the information sufficient and significant in making investment decisions. For example, the shareholders and investors will find the information on the share capital important in establishing the future prices of the share. They can decide to invest more by buying more shares or sell their shares if the performance is not promising. Liquidity information is also vital while making investment decisions. The investors can be able to establish the capability of the company in handling the liquidity and solvency hence informing on the investment decisions to make. Besides, market information comes handy in helping the users make investment decisions. The corporate management will also use the finance reports’ information in assessing and ensuring that investments and use of resources are done correctly (Roychowdhury et al., 2019).

Evaluation of Financial Reports in Investment Decision- Making

Various evaluation methods can be applied in analyzing financial reports in the decision-making process. Assessment of risks regarding the investors on offering loans to different companies indicates that it helps in making investment decisions. The rich information an investor has determined the investment decision to make. Capital investment analysis also helps in the decision-making procedure. The management appraisal of models on capital investment and environmental issues helps the company in successful investing in projects that will increase the company’s performance. Moreover, the company will be able to draw strategic management strategies in implementing the investment decision (Lefley & Sarkis, 2018, p. 37-57). Also, analysis of other information such as the public offering (IPO) and governance helps in making investment decisions. It gives information on the management of the shared selected companies. Lack of or inadequate financial information allows investors to utilize the management of the companies (Li et al., 2016, p. 283-304).

References

Amel-Zadeh, A., and Serafeim, G. (2018). Why and how investors use ESG information: Evidence from a global survey. Financial Analysts Journal, 74(3), pp.87-103.

Kawugana, A. and Faruna, F.S., (2019). Role of financial statement in investment decision making. International Journal in Management & Social Science, 7(1), pp.87-99.

Lefley, F., and Sarkis, J. (2018). The Evaluation of Environmental Capital Projects: The Way Forward. Contemporary Approaches and Strategies for Applied Logistics (pp. 37-57). IGI Global.

Li, Z., Wang, F. and Dong, X., (2016). Are all investment decisions to subscribe to new stocks mindless?: Investor heterogeneity and behavior in the process of subscribing to new shares. China Journal of Accounting Research, 9(4), pp.283-304.

Osadchy, E.A., Akhmetshin, E.M., Amirova, E.F., Bochkareva, T.N., Gazizyanova, Y. and Yumashev, A.V., (2018). Financial statements of a company as an information base for decision-making in a transforming economy.

Roychowdhury, S., Shroff, N., and Verdi, R.S., 2019. The effects of financial reporting and disclosure on corporate investment: A review. Journal of Accounting and Economics, 68(2-3), p.101246.