FSA to evaluate future potential & risk

Creditors and investors use financial performance evaluation to judge a company’s I. past performance. II. current position. III. future potential and its related risk. A. I and II. B. II and III. C. I and III. D. I, II and III the answer is A… I picked D as we can evaluate company’s: business risk (std dev of operating earning/mean op earning) sales variability ( std dev of sales/mean sales) I don’t understand where I am mistaken … thanks

because creditor and investors just care about the short-term performance of the company (credit and liquidity risk mainly). Mainly, the shareholders look at the future potential and its related risk (long-term performance). A is correct

"creditor and investors just care about the short-term performance of the company (credit and liquidity risk mainly). " What do you mean by “short-term” here? Why won’t all stakeholders look at the future potential and its related risk? I am not yet convinced!

Because if you are a bank and you will have to lend money to a company, then your analysis will be focused on the liquidity and credit risks as they will just care if the company will be solvent in the short term (meaning that they are more interested if the company can repay its debt on the short term…not in 20 year time). OF course also the shareholders care liquidity and short term trend of the company, but them are more focused on the long horizon. I hope this helps.

If I’m a potential investor in company XYZ, I will DEFINITELY look at XYZ’s future potential! It is maybe the most important factor for my capital gain ( I prefer capital appreciation :slight_smile: ). Well it does say “financial performance”, but for example a customer base is also a part of it and a good indicator of future performance. My 0.02$ Strangedays - what is the difference between investor and a shareholder? Milos

Agreed. But even as a banker you would care and not issue a 20 year loan to a company which (assuming) you know will go bankrupt in 5 years. Though the liquidity may be extremely high. Surely solvency of the company is a criteria in investing and credit related decisions.

An investor is a person, group of people or company that has an interest (financial or non-financial) in a particular company. A shareholder is a person, group of people or company that owns one or more shares in the company. A shareholder is therefore also an investors, but an investor is not necessarily a shareholder.

In my opinion, Investor is an owner of security issued by a company and a stakeholder is a person you are referring as an “investor”. This is just my opinion :slight_smile: Milos

I agree with milos

Stakeholders include investors, employees, suppliers, creditors and all related parties. Won’t they all be concerned about the solvency and hence use the FS of the company for the evaluation of future potential and its related risk?

Can’t explain, but I also agree on A. I think the key is in the purpose of financial statements, not in the definition of investors.

Yes, the purpose of financial statements is past performance and current position…the IS sand BS. I think its in the first chaper of FSA. Another one of my flash cards as well. I agree with pashuha00.

A because financial statements are not forward looking. Any assessment of future potential draws on material beyond financial statement reporting.