Uses and limits of financial statements

Financial statements are useful to many people:

• a report on stewardship: they tell the shareholders how well management has used their money;
• a basis for fiscal policy: the government uses them for taxes and policy;
• a basis for credit: banks and lenders decide whether to lend;
• a guide for investors, both for buying shares and for valuing the ones they hold;
• help for trade associations and stock exchanges.

They are part of the company's annual report, along with the directors' report, the auditors' report, the corporate governance report and the management discussion.

But they have limits:

• They use historical cost, so they do not show current values; and assets may not realise the amounts shown.
• They contain personal judgements, which may bring bias.
• They give aggregate (totalled) figures, not detail.
• Vital information may be missing: the loss of a big customer or market, for example, is not recorded.
• There is no qualitative information, such as labour relations or the quality of management.
• They are interim reports: one period, or one date.

So read them with care, and with what else you know about the business.