Essay

“The purpose of financial reporting is obtain cheap Capital”

Submitted to:

Dr. Zubair Ahmad

Submitted by:

Muhammad Ishfaq

MBA 1.5 (Eve)

MB2E-19-33

Session 2019-21

INSTITUTE OF MANAGEMENT SCIENCES

BAHAUDDIN ZAKARIYA UNIVERSITY
MULTAN

Total Words: 2104

Introduction
There are many usages of financial statements depending on its nature and requirements. The
basic purpose of financial statements is to provide useful and meaningful information to all the
shareholders and stakeholders of the company. The investor collect information about the
company from different sources and these sources include the financial statements of the
company and many other secondary resources (Lerman 2020). The investor pays huge attention
to the financial statements of the company for getting the required information and then make
decisions based on this available information. The information provided to individual investors,
investment institutions, and other financial institutes are filtered and altered as per the knowledge
and thoughts of investors (Blessing and Onoja 2015). The investors or shareholders are not
competent to understand the financial statements fully because they are not experts in it.
Therefore, companies alter financial reports and provide that information that is useful for
shareholders and make them happy. Shareholders main concern is the per share earning ratio or
profit that they will get by investing in the company (Brandt and Brandt 2016). The companies
try to reduce their capital cost and want to gain those capital which are cheap and they always
select those investors whom cost of capital is low (Xu 2020). The financial statements also help
in obtaining the cheap capital. As the help the companies in distinguishing the potential and
worthy investors/shareholders.

I am agreeing with this statement that “The purpose of financial statements is to obtain cheap
capital”. As there are many discussions about the usage of financial statements and the
companies use them according to their own needs and wants. The literature shows that there is
some in favor of this statement and some are not.

Body/ discussion

Financial statements play a key role in investment decisions as it provides the information
regarding the company performance, earnings, business practices, growth of the company and
investors make decisions based on this provided information (Roychowdhury, S., Shroff, N., and
Verdi 2019). There are many discussions regarding the financial report’s benefits and practices.
Some author believes that the financial statements help obtain cheap capital by using the window
dressing term and techniques and produced the information that attracts the investors
(Shakespeare 2020). Financial reports can improve investment efficiency and affect nearly every

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aspect of the financing decision by reducing information asymmetry and improving monitoring.
To start with, money related detailing can improve project choices by lessening data asymmetry
among managers and investors, just as among financial specialists, which can influence
unfavorable choice expenses and subsequently the expense of raising outside capital. Second,
accounting data can influence undertaking choices by modifying moral risk costs emerging from
organization clashes among different partners in the firm. An outstanding perception that rises
out of our survey is that money related revealing can at the same time improve speculation
effectiveness by diminishing good danger costs and lessen venture proficiency by giving
administrators motivating forces to settle on nearsighted venture choices (Roychowdhury, S.,
Shroff, N., and Verdi 2019). But there some authors that argue financial reports are not useful in
obtaining cheap capital and they are in contradiction with this statement. According to (Frank
and Shen 2016; Petacchi 2015) financial statements and reports and not useful for obtaining
cheap capital as they only the information that is useful for shareholders' interest and satisfies the
investor that their money is in safe hands and they will earn a handsome profit over their
investments. These reports might be universally useful reports which contain general data with
no focused-on partners gathering, though unique reason money related reports are coordinated to
fulfill extraordinary information need of a client gathering. For instance, a significant
moneylender of the organization may look for classified monetary report about the financial plan
of the organization (Sunder 2016). In any case, broadly useful money related reports don't and
can't give the entirety of the data that current and expected financial specialists, banks, and other
banks need. Those clients need to think about appropriate data from different sources, for
instance, general monetary conditions and desires, political occasions and political atmosphere,
and industry and friends' viewpoints (Gao 2019). The financial reports only provide the current
information about the status of the company and its working ventures not about that the
companies are obtaining and using cheap capitals to successfully run their business.

There are still many contradictions between that the financial reports are the main source for
obtaining cheap capital. According to (Guariglia and Yang 2016; Li 2015) the financial
statements are the most useful and appropriate reports to attract potential investors and
shareholders towards the company. the companies mention and include those details that attract
the investors and those that can be easily understandable by them (Blessing and Onoja 2015).
Mostly the company’s disclosure such information that attracts the investors and because these

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are not professional in financial statement analysis and they only believe in the information that
is given to them. To understand what is mention and described in the financial statement is the
work of professional, experts and government legislation authorities as they are expert in this
field and they know what is the actual meaning of this information and how much this
information is useful for decision making (Christensen et al. 2017). I am agreed with this
statement “the purpose of financial reporting is obtaining cheap capital” as companies show that
their companies are performing well and by investing in this you will also earn a good profit
margin and by investing in our company you can easily increase your wealth. The companies
show the investors and shareholder per share earning ratio and this makes them. The
shareholders are mostly interest in increasing their wealth and their main intentions are how to
increase their money and they always want to invest in those projects which are less risk and
their return is greater than the invest/expenses (Brand, Blok, and Verweij 2020). One of the
essential systems through which money related announcing is estimated to encourage venture
choices is through a decrease in antagonistic choice expenses coming about because of data
asymmetry among directors and capital suppliers. Financial statement data can diminish
unfavorable determination issues between the firm and new financial specialists (investors,
leasers, and so on.) if, for instance, monetary reports better depict the estimation of advantages
set up or of existing speculation openings. For this situation, to the degree that the data
asymmetry among chiefs and financial specialists is diminished, speculators would be
progressively prospective with capital, which would then empower monetarily obliged firms to
take advantage of new assumptions (Berger, Minnis, and Sutherland 2017; Li 2015). Empire
building happens when supervisors increment the size of the firm, through acquisitions or other
extension ventures, intending to gain more force, possibly higher remuneration, and more
prominent perquisite utilization. In such a circumstance, theorizes that administrators of firms
with accessible free incomes will be bound to attempt venture extends that expand the size of the
firm, even though these speculations are negative-NPV from the viewpoint of investors
(Shakespeare 2020). When the potential investor saw such kind of achievements of organizations
than they are intentionally and by their free consent wants to invest in that company, as they saw
that company performance is very good and it is growing very well, and this help the companies
in obtaining cheap capital, because they are promising that their investors investment is in right
hand and they will earn a good profit margin in the future. There are many cases and evidences

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that shows that financial reports are the main documents that attract the investors and help the
company in increase their capital and also this help in reducing the cost of capital by providing
the good representation of organizations performance. the importance of financial statements can
be analyzed from the (Roychowdhury, S., Shroff, N., and Verdi 2019) in these two points; (I) the
nearness of data asymmetry that gives ascend to organization grindings, for example, unfriendly
determination and good peril expenses, and (ii) the nearness of vulnerability about development
openings. The structure we give is in no way, shape, or form total or great, and the channels we
feature are not commonly restrictive or comprehensive. Two particular situations are
conceivable. Initially, accounting data uncovered by peer firms can lessen chiefs' (and investors')
vulnerability about development openings for their organizations, consequently improving
speculation productivity. Simultaneously, to the degree their firms distort their fiscal summaries,
firms may put resources into negative NPV extends by depending on the exposures of
companion firms. Second, the introduction and planning of money related reports for their own
organizations can improve administrators' data sets, which at that point influences the nature of
their venture choices (Zetlin-Jones and Shourideh 2017). In financial statements companies’
disclosures about their earning per share and dividend paid to its customers, the market price of
the share, total shareholders’ equity, debt, liabilities, and many other entries information that are
necessary for investors for making investment decisions. Shareholders/investors' main concerns
are about the profit margin that is given to them and how companies are operating and what is
the type of business, then they predict the performance of the organization. When they are
satisfied by the provided evidence then invest in the business (Frank and Shen 2016; Lewellen
and Lewellen 2016). The companies cannot always run their business on their capital, they
always need extra and outsourced capital to run the business smoothly and for this purpose, the
best way for companies is to encouraged investors and shareholders to invest more in the
business. The financial statements are the most powerful techniques to attract the customers,
because they believe that financial reports are the most reliable and authentic source to know
about the company strength and weaknesses (Ball, Li, and Shivakumar 2015). the connection
between money related announcing quality and overinvestment is more grounded for firms with
high free incomes, which proposes that budgetary revealing quality can decrease the data
asymmetry among administrators and financial specialists and in this manner bring down
investors' expense of observing chiefs and improving undertaking determination (Wang, Zhu,

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and Hoffmire 2015). Corporate associations owe an obligation to completely uncover matters
concerning their activities in order to help financial specialists in settling on speculation choices
since Investment leaders depend on data got from budget reports to anticipate future paces of
return. Without the money related proclamation, there will be an issue of how to decide the
benefit of an organization, and assessment of execution of an organization. The general objective
is to find out the job of budget summary in venture dynamic. For this purpose companies use the
window dressing techniques, this means that companies produce the two kind of financial
reports; one for internal use in which all the fair and accurate information is written and this
report is used by the internal stakeholders of company (Board of director, Top Manager,
Executives and other management teams) and second external reports in which they mentioned
such information that attract the potential investors, shareholders and in this they disclosure such
information that can be easily understand by the reader and help them in making investment
decisions (Bhasin 2016; Chen, Cohen, and Lou 2016).

Conclusion

I started by explaining the usage of financial statements in decision making and how these help
in making a capital-related decision. and who are the user of these statements and how they
extract useful information from the reports? First of all, I discuss some points of disagreement
and why some authors disagree with this statement. Then I started the agreement point because I
agree with this statement and build a strong base on this point. The different researchers explain
the relationship of financial reports with capital borrowing decisions and how companies modify
statements for getting the required results. The research shows that shareholders and some
investors are unable to understand the financial statements properly and they believe in the given
information and make the investment decision based on their understandings. As, budgetary
detailing can diminish data asymmetry and, by improving observing. I suggest that one region of
building up a superior comprehension of the highlights of divulgence that improve speculation
proficiency, for example, diminishes data asymmetry without having unintended outcomes. I
examine capital structures and their relationship to the financing choices of firms. Next, I look at
the financing decisions firms make and the job money related to announcing plays in these
decisions. I review the exploration of financing choices, beginning with the issue of value and

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obligation and afterward moving into exchange organizing, including renting and securitizations.
Bookkeeping assumes a noteworthy job in the financing choices made by firms.

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