General purpose financial statements

A common example of GPFR’s helping users make decisions in the business world are potential investors and creditors utilising the data contained within the financial statements to calculate financial ratios which describe the business’ liquidity, solvency and profitability. By comparing these ratios with those calculated from the financial statements of other businesses, the business’ liquidity, solvency, efficiency and profitability relative to industry standards can be determined and thus an assessment made on how competitive the business is. By comparing these ratios with those calculated from the business’ previous years’ financial statements, an assessment can be made on whether the business is on the rise or in decline. Utilising the comparisons mentioned above, potential investors and creditors can make a fair assessment on a business’ future prospects and hence make a decision on whether it is wise to lend the business money or invest in it.

An example of a potential creditor performing such procedures is a bank considering a loan application. ANZ bank requires that any existing business provide GPFR’s for it to analyse before a loan application can be considered. This emphasises the importance of the GPFR’s in decision making processes. Likewise, potential investors such as conscious players in the stock market rely heavily on GPFR’s to engage in the ‘fundamental analysis’ of a company in order to derive its ‘intrinsic value’, which is a crucial factor in making investment decisions.

The extent to which GPFR’s are useful in decision making is dependent on both the amount and the relevance of the data contained within these reports. This is evidenced in the article Trusting the figures: Investors want more information which describes the results of a survey of private investors in the Listed Property Trusts market about the usefulness of GPFR’s in decision making. Of the respondents, 19.3% said that the reports were very useful while 48.0% stated that the reports were moderately useful, confirming the importance of these reports in the decision making process. However, the majority of respondents also indicated that the GPFR’s would be even more useful if additional information such as management’s commentary and future strategies were included in the reports.

To conclude, although general purpose financial statements do tend to reflect past events, they are far from useless in helping users make decisions about future actions. In fact, they are integral to some decision making processes and there are plenty of examples in today’s business environment which demonstrate this.

Bibliography

Institute of Chartered Accountants of New Zealand: Statement of Concepts for  General Purpose Financial Reporting, (1993), paragraph 1.5.

ANZ Bank: Welcome to ANZ Business Finance Online, =, (18 April 2003).

Australian Stock Exchange: Analysing and selecting shares,

, (18 April 2003).

Chiu, P.: ‘Trusting the figures: Investors want more information’

Australian Accountant, (Melbourne: Aug 1996.), Vol. 66, Iss. 7; pp. 44.

Kimmel, P., Carlon. S., Loftus, J., Mladenovic, R., Kieso, D., and Weygandt, J.: Accounting: Building Business Skills (Brisbane, John Wiley & Sons Australia Ltd, 2003).