Presenting to Stakeholders

    to Stakeholders

    Resources:pp. 192 and 193 (Ch. 6) of Understanding Financial Statements

    Read the scenario in Problem 6.9 on p.
    234 (Ch. 6).

    Compose a 350- to 500-word response
    that includes a paragraph about the main ideas of the annual report and an
    explanation of how you might present these ideas to stakeholders.

    Refer to the questions in the
    Objectives of Analysis section on pp. 192 and 193 (Ch. 6) for guidance on
    tailoring ideas to present to stakeholders.

    Format your paper consistent with APA

    Post your paper as a Microsoft®
    Word attachment.

    6.9. Writing Skills Problem
    R.E.C. Inc.’s staff of accountants finished preparing the financial
    statements for 2007 and
    will meet next week with the company’s CEO as well as the Director
    of Investor Relations
    and representatives from the marketing and art departments to
    design the current year’s
    annual report.
    Write a paragraph in which you present the main idea(s) you think
    the company should
    present to
    shareholders in the annual report.

    Objectives of Analysis
    Before beginning the analysis of any firm’s financial statements,
    it is necessary to specify
    the objectives of the analysis.The objectives will vary depending
    on the perspective
    of the financial statement user and the specific questions that
    are addressed by the
    analysis of the financial statement data.
    A creditoris ultimately concerned with the ability of an
    existing or prospective
    borrower to make interest and principal payments on borrowed
    funds. The questions
    raised in a credit analysis should include:
    • What is the borrowing cause? What do the financial
    statements reveal about the
    reason a firm has requested a loan or the purchase of goods on
    • What is the firm’s capital structure? How much debt is
    currently outstanding?
    How well has debt been serviced in the past?
    • What will be the source of debt repayment? How well does
    the company manage
    working capital? Is the firm generating cash from operations?
    The credit analyst will use the historical record of the company,
    as presented in the
    financial statements, to answer such questions and to predict the
    potential of the firm
    to satisfy future demands for cash, including debt service.
    The investorattempts to arrive at an estimation of a
    company’s future earnings
    stream in order to attach a value to the securities being
    considered for purchase or
    liquidation.The investment analyst poses such questions as:
    • What is the company’s performance record, and what are
    the future expectations?
    What is its record with regard to growth and stability of
    earnings? Of cash flow
    from operations?
    • How much riskis inherent in the firm’s existing capital
    structure? What are the
    expected returns, given the
    firm’s current condition and future outlook?
    • How successfully does the firm compete in its industry, and how
    well positioned is
    the company to hold or improve its competitive position?
    The investment analyst also uses historical financial statement
    data to forecast the
    future. In the case of the investor, the ultimate objective is to
    determine whether the
    investment is sound.
    Financial statement analysis from the standpoint of management
    relates to all of
    the questions raised by creditors and investors because these user
    groups must be satisfied
    in order for the firm to obtain capital as needed. Management must
    also consider
    its employees, the general public, regulators, and the financial
    press. Management
    looks to financial statement data to determine:
    • How wellhas the firm performed and why? What operating
    contributed to success and which have not?
    • What are the strengths and weaknessesof the company’s
    financial position?
    • What changesshould be implemented in order to improve
    future performance?
    Financial statements provide insight into the company’s current
    status and lead
    to the development of policies and strategies for the future. It
    should be pointed
    out, however, that management also has responsibility for
    preparing the financial
    statements.The analyst should be alert to the potential for
    management to influence
    the outcome of financial statement reporting in order to appeal to
    investors, and other users. It is important that any analysis of
    financial statements
    include a careful reading of the notes to the financial
    statements, and it may be helpful
    to supplement the analysis with other material in the annual
    report and with
    other sources of information apart from the annual report.

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