Stockholders of corporations need financial information to help them make decisions on what to do with their investments (shares of stock), i.e. hold, sell, or buy more. The general public is also interested in the financials of the company which includes analysts, students for their education, researchers who sometimes need the data while performing surveys or any other research, etc. Government agencies want to know the financial condition and profits of a regulated business, which can impact the prices they will allow a firm to charge to its customers. They also use financial statements to protect the association’s interests and formulate necessary policies.
Figure 1.3 offers an overview of some of the differences between financial and managerial accounting. Management accounting information as a term encompasses many activities within an organization. Preparing a budget, for example, allows an organization to estimate the financial performance for the upcoming year or years and plan for adjustments to scale operations according to the projections. Accountants often lead the budgeting process by gathering information from internal (estimates from the sales and engineering departments, for example) and external (trade groups and economic forecasts, for example) sources. These data are then compiled and presented to decision makers within the organization.
- The cash flow statement is of particular interest to lenders and creditors.
- Customer or clients may become interested in knowing whether a company is capable of continuously providing their needs.
- They are after the ability of the company to pay salaries and provide employee benefits.
- Without accounting information, these agencies may miscalculate the revenues generated for the government.
- Business involves a large amount of uncertainty, and accountants cannot predict how the organization will perform in the future.
Internal users (primary users) – If a user of the information is part of the business itself then he/she is considered as one of the internal or primary users of accounting information. Accounting is the language of business, it brings life to the otherwise lifeless business activities. It acts as a bridge between users of the information and the day to day transactions that occur inside a business. Outside analysts want to see financial statements in order to decide whether they should recommend the company’s securities to their clients.
Internal users of Accounting information
Accountants can, with a fair amount of confidence, accurately report the financial performance of the organization related to past activities. The feedback value offered by the accounting information is particularly useful to internal users. That is, reviewing how the organization performed in the past can help managers and other employees make better decisions about and adjustments to future activities. An alternative to the numerical analysis of financial statements is to produce reliable financial information and be aware of an assumption used in preparing financial statements. However, due to several changes in auditors, it is difficult to have an opinion of detecting fraud on time poses ‘reporting problems’.
In the absence of proper accounting records, non-profit organizations cannot satisfy their members and other stakeholders regarding the ways in which their financial affairs are conducted. Even non-profit making organizations, including clubs, non-governmental organizations (NGOs), and welfare societies, require accounting information to manage their affairs properly. External users (secondary users) – If a user of the information is an external party and is not related to the business then he/she is considered as one of the external or secondary users of accounting information.
Regulatory agencies
By scrutinizing revenues, costs, and expenses, the management team can identify areas of strength and weakness, and adjust strategies accordingly. They can pinpoint which product lines are most profitable, or identify sectors of the business that are underperforming. The income statement offers investors insights into the company’s profitability. It shows revenues, costs, and expenses, allowing investors to evaluate how profitably a company operates.
Typically, the best place to find these reports for a public company can be on their website under the Investor relations section. Financial statements used by external entities are prepared using generally accepted accounting principles, or GAAP. A company’s financial statements consist of the profit and loss statement, balance sheet and cash flow statement. These statements indicate the financial health of the business, and are used by both internal and external stakeholders to make decisions and predictions about the business.
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Lastly, lenders and creditors may use the statement of changes in equity to observe any substantial changes in equity, such as a big drop in retained earnings, which might indicate financial trouble. Finally, the statement of changes in equity gives investors information about the company’s retained earnings and dividends, both of which can significantly impact an investor’s return on investment. Indeed, financial statements are not merely dull documents filled with numbers. They are powerful analytical tools that, when understood and used properly, can guide companies towards financial success.
Tax Authorities and Regulatory Agencies
When there is a long-term involvement or contract between the company and its customers, the customers become interested in the company’s ability to continue its existence and maintain stability of operations. This need is also heightened in cases where the customers depend upon the entity. Lenders of funds such as banks, financial institutions, and bondholders, are interested in the company’s ability to pay liabilities upon maturity (solvency).
The users of the financial information are the ones who read the financial statements of the company because they have an interest in the company directly or indirectly. Despite the distinct interests of each group, their needs are interconnected. They all rely on the same set of financial statements to gain insights into the company’s financial the social security position, profitability, and cash flows. This underscores the vital role financial statements play in the world of business. They serve as a common language, linking diverse stakeholders through the shared understanding of a company’s financial story. The balance sheet provides suppliers with a snapshot of a company’s financial position.
A consistently profitable company is more likely to have the resources to repay its debts. Overall, financial statements serve as a compass for management, guiding them towards informed, strategic decision-making and effective financial management. They allow the management to monitor the company’s financial progress, evaluate the results of their decisions, and plan for a prosperous future. The income statement is a vital tool for measuring the company’s profitability.
Suppliers, much like lenders and creditors, also have a keen interest in a company’s financial statements. These business partners provide goods and services that are critical for a company’s operations. Therefore, they need assurance that the company can pay for these supplies in a timely manner. If you want to know how a business is performing, financial statements provide the answer. The users of financial statements such as the balance sheet include people both inside and outside your company.
If the company fails to consider that customers also purchase a complementary good (you might recall that term from your study of economics), the company may be making the wrong decision. For example, assume that you have a company that produces and sells both computer printers and the replacement ink cartridges. If the company decided to eliminate the printers, then it would also lose the cartridge sales. In the past, in some cases, the elimination of one component, such as printers, led to customers switching to a different producer for its computers and other peripheral hardware. In the end, an organization needs to consider both the financial and nonfinancial aspects of a decision, and sometimes the effects are not intuitively obvious at the time of the decision.