Understanding financial statements, stakeholders and their limitations

At the end of every year, quarter, or as stipulated by regulation and governance of different countries, business entities and other organizations must avail to tax bodies their tax returns and financial statements. Financial statements include the balance sheet, income statement, the cash flow statements and the notes explaining the items in the statements.

Financial statements summarize and entail all the financial actions and transactions of business entities they have been transacting through a stipulated period of time and they should be prepared according to international financial reporting systems with disclosures from the management.

These Financials should be prepared in a way that they are easy to interpret and understand by users.

The purposes of financial statements are for identifying the strengths and weaknesses of the firm by properly establishing relationships between the various items in accounts and financial statements.

The analysis of financial statements can be undertaken by any stakeholder who include; owners of the business, trade creditors, lenders, investors, labor unions, employees, analysts and others who might have interest in the business.

The nature of analysis will differ depending on the purpose of the analysis a technique frequently used by an analyst not necessarily serve the purpose of other analysts because of the difference in interests of analysts.

Though financial statements are useful documents, good indicators of a business performance and for tax purposes, there are hinges and challenges that should critically be studied and need thorough attention when dealing with financials of organizations.

In corporate businesses, financial statements necessarily depend on estimates and judgments that call to offset the mark are many. Even when made in good faith therefore tax authorities must not only go with numbers but must also know how to logically analyse business statuses and other financial metrics, algorithms and many other considerations.

Revenue recognition is a tricky piece of the regulatory puzzle like when a business incurs future expenses on a contract and sale. Like when a company sells smart phones manufacturing equipment, internet service or expensive software package to an individual or a company that require after sale services. The contract for that product or service often includes future upgrades whose costs cannot be predicted at the time of the sale. Therefore it is impossible to determine how much profit the sale will generate.

The shortcoming of revenue-recognition practices have also caused companies to increasingly use unofficial measures to report financial performance, especially for businesses operating in the virtual space.

The colossal success of social networks and Media such as Facebook, Twitter; and online marketplaces have quickly demonstrated that traditional guidelines for the recognition and measurement of revenue and expenses were preventing them from truly reflecting their businesses’ value is reported in accounts instead of financial statements.

Unsurprisingly, these companies have soon begun to adopt alternative ways to report on earnings. Here then tax analysts and experts must have thorough knowledge of online businesses and changes in technologies.

Some financial statements do not address non-financial issues, such as the environmental attentiveness of the company’s operations, or how well it works with the local communities. A business reporting excellent financial results might be a failure in these areas.

There are many more limitations and preceding issues to financial statements, therefore there is need to keep trainings, seminars to different tax organizations and stakeholders on the ever changing international financial reporting systems and standards, the changing face of businesses, co operate social responsibility part of business and environments.

editor@newtimesrwanda.com

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