Question

Reporting of Subsequent Events.

Overview:

Corporate executives make thousands of operational decisions every day on behalf of their companies. Those decisions are often made to present the best possible financial picture, but is that ethical? Instructions: Lionel Industries, Inc. Board of Directors authorized the sale of $15,000,000 of corporate bonds in May, 2017. The treasurer, William Browning, is concerned about the date when the bonds will be issued. The company really needs the cash, but he is worried that if the bonds are issued before the December 31, 2017, year-end that the additional liability will have an adverse effect on a number of important financial ratios. In June, 2017, he explains to the company CEO Julie Friesling that if they delay issuing the bonds until immediately after December 31, 2017 the bonds will not affect the financial statements until 2018. The 2017 financial statements would then only need a footnote disclosure and Browning feels that "no one pays attention to those numerous pages of notes anyway."

Answer the following questions:

1) Who are the primary financial statement users, and is Browning correct in his assumptions as to how they view the information included in the footnotes?

Answer 1

The main users (stakeholders) of financial statements are commonly grouped as follows:

1) Investors-Investors and potential investors are interested in their potential profits and the security of their investment. Future profits may be estimated from the target company's past performance as shown in the income statement. The security of their investment will be revealed by the financial strength and solvency of the company as shown in the statement of financial position. The largest and most sophisticated groups of investors are the institutional investors, such as pension funds and unit trusts.
2)Employees-Employees and trade union representatives need to know if an employer can offer secure employment and possible pay rises. They will also have a keen interest in the salaries and benefits enjoyed by senior management. Information about divisional profitability will also be useful if a part of the business is threatened with closure.
3)Lender-Lenders need to know if they will be repaid. This will depend on the solvency of the company, which should be revealed by the statement of financial position. Long-term loans may also be backed by 'security' given by the business over specific assets. The value of these assets will be indicated in the statement of financial position.
4)Goverment-Government agencies need to know how the economy is performing in order to plan financial and industrial policies. The tax authorities also use financial statements as a basis for assessing the amount of tax payable by a business.
5)Suppliers-Suppliers need to know if they will be paid. New suppliers may also require reassurance about the financial health of a business before agreeing to supply goods.
6)Customers-Customers need to know that a company can continue to supply them into the future. This is especially true if the customer is dependent on a company for specialised supplies.
7)Public-The public may wish to assess the effect of the company on the economy, local environment and local community. Companies may contribute to their local economy and community through providing employment and business for local suppliers. Some companies also run corporate responsibility programmes through which they support the environment, economy and community by, for example supporting recycling schemes.

Management and competitors would also use the financial statements of a business to make economic decisions. Management, however, would predominantly use monthly management accounts as their main source of financial information. It is also unlikely that a business would prepare financial statements for the purpose of aiding competitors.

Browning is not correct in his assumption.Notes to accounts are integral parts of books of accounts.All the stake holders get a clear view about the business financial performance by analyzing the Notes to accounts.