You work as part of a team that selects part suppliers for a large manufacturer. Your company is highly dependent on your suppliers, and you want long-term relationships. You want suppliers who are financially stable, without cash flow problems. If they need more capacity in order to grow with you, you want them to be able to attract additional investors.
One of your team members claims that financial statements tell you everything you need to know to determine the future stability and growth potential of a supplier. Another claims that financial statements are useless in the process, and that talking with the people in the company is the only route to judging its future.
Required. Discuss the strengths and weaknesses of financial statements in assisting you as you try to determine the stability and growth potential of possible suppliers. What can you learn about a company from a standard set of financial statements? What are the limitations of financial statements? What would you look at in the statements to judge a supplier's ability to remain in business and avoid cash flow problems? What relationships in the statements would help you judge whether the company could attract additional capital for growth?