Means of conveying information to investors:
Relevant financial information is provided primarily through financial statements and related
Balance Sheet (Statement of Financial Position)
Income Statement (Statement of Earnings / Statement of Operations)
Statement of Cash Flows
Statement of Shareholders’ Equity
The notes to these financial statements.
Starting in 2012, companies must
provide a Statement of Other
Comprehensive Income immediately following the Income Statement,
Combined Statement of Comprehensive Income that includes the information normally
contained in both the Income Statement and the Statement of Other Comprehensive
[There are other means such as press releases, websites, proxy statements and other required
filings, and direct communication with lenders and investors, but in this course we will focus
only on information presented in the financial statements and the notes to these financial
Information Needs of Investors and Creditors
1. Investors look for two sources of possible cash flow:
Periodic dividend distributions from the corporation.
The ultimate sale of the ownership shares of stock.
: An investor purchased 100 shares of Growmore Inc for $10,000 in 2009. At the end
of 2009 the investors received $500 dividends from Growmore, and the investor sold the 100
shares during 2010 for $12,000.
2. Creditors lend money to a company for a specific length of time. They hope to gain by
charging interest on the money they lend.
A bank lent $10,000 to Bad Idea Company for one year at an interest rate of 15%.
How does an investor choose between alternatives?
expected rate of return
on various projects.
uncertainty or risk
of the expected return.
Suppose and individual can lend money to Bad Idea Co. at terms given in Example 2 or can
invest in a US Treasury bond which pays 5 percent return per year with the principal and interest
being federally insured.
Which option would he/she choose?