USERS OF FINANCIAL STATEMENTS Specifically, explain external and internal users

Question

USERS OF FINANCIAL STATEMENTS Specifically, explain external and internal users of financial statements by referring to two financial ratios in assessing the company's health (paragraph 1 -5 points) Beyond the limitations of financial statement ratios of any company, discuss why any one of the following as a risk factor/warning sign considerations to external/internal (paragraph 2 -5 points) 1. A company's revenue tied to one key customer 2. A company's revenue tied to one key product 3. A company's revenue tied to one key supplier 4. The percentage of a company's businesses generated overseas 5. A company's level of competition 6. How prudent for a company to invest in research and development? 7. The implications for laws/regulations (be specific to a particular firm/industry In one reply to other student, clearly agree or disagree with substance (avoid general comments such as "this great and I agree or vice versa" (paragraph 3-5 points) Appropriate organization/formatting and citation/references (5 points)

Explanation / Answer

External users of financial ratios are clients, broking agents, analysts, credit rating agencies, stock exchanges and other financial institutions. Internal users are promoters, board of directors and the finance department. Two commonly used financial ratios are profit margin & Return on Equity (ROE).

For points 1 to 3, cash flows, profitability & sustainabily would be at stake if the company depends only on one revenue stream without any diversification.

For point 4, risk would be diversified if a percentage of business is generated from overseas instead of depending upon domestic market entirely.

For point 5, healthy competition is beneficial while unhealthy competition can negatively impact company's performance and chances are that the company may lose its value in the marketplace too.

For point 6, research & development is critical to company's future growth in order to come up with product innovations and maintain its uniqueness in the marketplace.

For point 7, open policies are welcome while restrictive policies can affect company's growth prospects making it riskier to operate in any marketplace.

I agree that financial ratios and risk assesment parameters are an important tool to determine company's growth prospects.

Infosys is one such example from India which depended entirely on one client, one vendor and one product therefore it was unable to diversify its product base resulting in revenues being squeezed for the organization.

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