You work as part of a team that selects part suppliers for a large manufacturer.
ID: 2350041 • Letter: Y
Question
You work as part of a team that selects part suppliers for a large manufacturer. Your company is highly dependent on your suppliers, and you want long-term relationships. You want suppliers who are financially stable, without cash flow problems. If they need more capacity in order to grow with you, you want them to be able to attract additional investors.One of your team members claims that financial statements tell you everything you need to know to determine the future stability and growth potential of a supplier. Another claims that financial statements are useless in the process, and that talking with the people in the company is the only route to judging its future.
Required. Discuss the strengths and weaknesses of financial statements in assisting you as you try to determine the stability and growth potential of possible suppliers. What can you learn about a company from a standard set of financial statements? What are the limitations of financial statements? What would you look at in the statements to judge a supplier
Explanation / Answer
A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. They typically include four basic financial statements, accompanied by a management discussion and analysis: 1.Statement of Financial Position: also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time. 2.Statement of Comprehensive Income: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A Profit & Loss statement provides information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. 3.Statement of Changes in Equity: explains the changes of the company's equity throughout the reporting period 4.Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities. "The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions."Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position. Strengths of Financial statements :: 1.Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders. 2.Employees also use these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings. 3. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions. Weakness of Financial statements:: 1.The financial statements sometimes do not meed the objective to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions 2. Financial statements are sometimes not understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are sometimes not directly related to an organization's financial position. 3. Financial statemetns of poor reported quality defeat the basic purpose of readers who wish to have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently
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