'Analysis of financial statements is useful and significant to different users.' Which of the following users is concerned with a firm's long-term solvency and survival?
We need to identify which user of financial statements is primarily concerned with a firm's long-term solvency and survival. Step 1: Understand the different users of financial statements and their interests.
Labour unions: Interested in the firm's profitability and ability to pay wages, bonuses, and provide job security. They focus on short-term to medium-term viability rather than long-term solvency.
Trade payables (Creditors): Interested in the firm's short-term liquidity and ability to pay amounts due in the near future (usually 30-90 days). They focus on current ratio, quick ratio, etc.
Finance manager: Interested in overall financial health for decision-making, including profitability, efficiency, and both short-term and long-term aspects. However, their concern is internal management.
Lenders (Long-term creditors): Lenders include banks, financial institutions, and debenture holders who have provided long-term loans. They are primarily concerned with the firm's long-term solvency and survival because:
They need assurance that the firm will be able to pay interest regularly
They need assurance that the principal amount will be repaid at maturity
They analyze ratios like debt-equity ratio, interest coverage ratio, and profitability over the long term
Step 2: Match with the given options.
(A) Labour unions: Concerned with wages and job security, not primarily long-term solvency.
(B) Trade payables: Concerned with short-term liquidity, not long-term solvency.
(C) Finance manager: Concerned with overall management, not specifically as an external user.
(D) Lenders: ✓ Correct. Lenders are most concerned with long-term solvency and survival.
