Portfolio Activity Unit 1

Managerial Accounting

BUS 5110

Title: Financial Analysis of Polly's Pet Products: A Case Study

By: - Dekamo Fiseha Lomiso

University of People

February, 2024
Financial statements are essential documents that provide valuable insights into a company's

financial health and performance. While investors and analysts often use these statements to

assess investment opportunities, it's crucial to recognize that financial statements are not just for

investors. Various stakeholders, including creditors, employees, management, regulators, and

even the company itself, should be concerned with a company's financial statements for several

reasons.

Firstly, creditors, such as banks and financial institutions, rely on financial statements to

evaluate a company's creditworthiness and determine the likelihood of repayment. By analyzing

key financial ratios and metrics, creditors assess the company's ability to meet its debt

obligations and manage its financial resources effectively. For example, creditors may review the

company's liquidity ratios, such as the current ratio and quick ratio, to gauge its short-term

solvency and ability to repay short-term debts. Therefore, accurate and transparent financial

statements are crucial for maintaining positive relationships with creditors and securing

favorable lending terms.

Secondly, employees have a vested interest in a company's financial statements as they provide

valuable insights into the company's financial stability, profitability, and future prospects. For

instance, employees may examine the company's income statement to assess its profitability and

potential for growth, as well as the statement of cash flows to understand its cash flow position

and ability to invest in employee development programs or expansion initiatives. Transparent

financial reporting fosters trust and confidence among employees, leading to a more engaged and

motivated workforce.

Thirdly, management relies on financial statements to monitor the company's performance,

identify areas of strength and weakness, and make informed strategic decisions. By analyzing
trends in revenue, expenses, and profitability, management can assess the effectiveness of

business strategies and adjust course as needed. For example, management may use financial

statements to evaluate the performance of different product lines or business segments and

allocate resources accordingly. Additionally, financial statements help management track

progress towards organizational goals and communicate financial performance to internal

stakeholders.

Furthermore, regulators and government agencies use financial statements to ensure

compliance with accounting standards, regulations, and tax laws. For instance, the Securities and

Exchange Commission (SEC) requires publicly traded companies to file regular financial reports,

including quarterly and annual financial statements, to provide transparency and accountability

to investors and the public. Regulators may conduct audits and reviews of financial statements to

detect any discrepancies or irregularities and ensure compliance with reporting requirements.

Lastly, companies themselves should be concerned with their financial statements as they serve

as a vital tool for internal decision-making, performance evaluation, and strategic planning. By

regularly analyzing financial statements, companies can identify areas for improvement, allocate

resources effectively, and enhance overall financial performance. Financial statements also

provide a benchmark for evaluating the company's performance relative to industry peers and

competitors.

Conclusion

Financial statements are not just for investors; they are essential documents that are relevant to a

wide range of stakeholders, including creditors, employees, management, regulators, and the

company itself. Transparent and accurate financial reporting is critical for maintaining trust,
facilitating decision-making, ensuring compliance, and driving long-term success. As a student,

understanding the importance of financial statements will benefit me in my future career

endeavors, whether I work in finance, management, or any other field where financial literacy is

essential.

References

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2018). Financial Accounting: Tools for Business

Decision-Making (8th ed.). Wiley.

Stickney, C. P., Weil, R. L., Schipper, K., & Francis, J. (2019). Financial Reporting, Financial

Statement Analysis and Valuation (9th ed.). Cengage Learning.