Users of Accounting Information
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Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization. Internal Users of accounting information are those individuals directly involved in managing and operating an organization and users within the company. They include managers, internal auditors, sales staff, budget officers, controllers, officers, directors, and other important internal decision makers. Internal users make the strategic and operational decisions for the business or organization. The internal role of accounting is to provide information to help improve the efficiency or effectiveness of an organization in delivering products or services to the marketplace. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. Internal users or users directly affiliated with the company use managerial accounting, which includes in-depth reports used to determine financial strengths as well as weak points. These reports help aid in the decision making process within the separate departments of a company.
For example, Human Resource managers have to ensure the rights of their employee by using wage information along with other data. On the other hand, a Sales Manager may need to review financial statements to assess sales people are making their quota and so on. Internal users of accounting information include the following: * Management: for analyzing the organization’s performance and position and taking appropriate measures to improve the company results. A company’s top leadership is the primary users of corporate financial statements. Senior executives view accounting reports as strategic tools to assess the economic viability of their businesses. Specifically, senior personnel compare past and current data, identifying nonperforming business units. This comparison is essential, as it provides management information necessary to correct past mistakes and draw up adequate strategies for long-term operating activities. Understanding that failure is the mother of success, department heads and segment chiefs identify weaknesses in their operations and provide effective mitigating plans.
A company’s balance sheet and statement of profit and loss indicate corporate profitability and net worth to management. They also act as agents of the owners. The managers, whether owner or hired, regularly face economic decisions – How much supplies will we purchase? Do we have the cash? How much did we make last year? Did we meet our targets? All those, and many other decisions, require analysis of accounting information. * Employees: for assessing company’s profitability and its consequence on their future remuneration and job security. Employees have an interest in financial statements because they need assurances for job retention. Employees can also have an interest in their company’s stock price, which has a close relationship to the company’s accounting information. Employee stock options may increase or decrease precipitously based on the company’s financial health. Employees need this information to determine if they should buy more or hold their current investment level.
The internal users of financial statements include accounting personnel, department heads, corporate auditors, business-unit leaders and top management. These reports are relevant to each constituency because they provide specific, varying data. For accounting personnel, the overarching objective is to prepare and present accurate, complete data in accordance with norms. Department heads and segment leaders bring fresh eyes to financial issues by delving into accounting reports. For internal auditors, accounting reports shed light on the tools a company uses to comply with rules. Top management sifts through financial statements to understand the overall situation of the company, as well as what it would take to bring it to the next competitive level. External users are not directly involved in the running of the business. They include shareholders, lenders, customers, suppliers, consumer groups, external auditors, government agencies, regulators, lawyers, brokers and the press. Yet these users can affect and be affected by the organization.
External users rely on accounting information to make better decisions in pursuing their goals for the organization. External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions. The external users would receive limited financial information from the target company, such as general-purpose financial statements; these statements have just enough information to inform external users of the company’s economic position. General-purpose statements are in the area of financial accounting, which is the type of accounting aimed at supplying information to users not directly affiliated with the target company. External users of accounting information include the following: * Lenders: lenders have an interest in both a company’s profit and cash flow. These users may have given loans to the business. Lenders such as investors, banks and other financial institutions are interested in such statements for the fact if they were to lend the company money they would need to asses that the company would be able to afford to repay loaned money plus the interest that would be due.
Companies with an inability to repay the loans increase the lender’s risk. Lenders often require several months of financial statements for review before lending money. Periodic updates are also necessary to ensure borrowers still have the ability to repay loans. * Customers: for assessing the financial position of its supplier which is necessary for a stable source of supply in the long term. When there is a long-term involvement or contract between the company and its customers, the customers may be interested in the company’s ability to continue existence or its stability of operations. This need is also heightened in cases where the customers depend, for one reason or another, upon the entity. For example, a distributor company, the customer in this case, is dependent upon the manufacturing company from which it purchases the items it resells. * Suppliers: suppliers often open trade accounts with many companies in the business environment. This allows businesses to pay off purchases over a stated period of time rather than all at once. Suppliers prefer to work with financially healthy companies when selling goods.
This often ensures payment in the future. Suppliers looking for new clients may also review financial statements to find profitable and stable clients. Suppliers are interested in the company’s ability to pay obligations when they become due. They are nonetheless especially interested in the company’s liquidity which its ability to pay short-term obligations. * Government: governing bodies of the state, especially the tax authorities, are interested in an entity’s financial information for taxation and regulatory purposes. Besides, also for determining the credibility of the tax returns filed on behalf of the company. Taxes are computed based on the results of operations and other tax bases. In general, the state would like to know how much the taxpayer is making to determine the tax due thereon.Financial statement information or financial reports from larger businesses or incorporations are often sent to the government for analysis. The government uses the financial information presented in the statements and reports to determine whether the company is paying the amount of taxes it needs to operate legally under the IRS business requirements.
The amount of taxes the business has paid during that fiscal period is compared to the figures in the financial statements. The government then determines whether the information is true. * Investors and shareholders: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Investors and financial-market participants pore over corporate financial statements to ensure that top executives are managing operating activities satisfactorily. In addition, securities-exchange players sift through accounting reports to find the next investment jewel, that is, the company with an affordable stock price and interesting medium-to-long-term growth potential. Investors and shareholders are particularly interested in a company’s financial information, as they use it to determine whether the company would be worth making investments in. Investors and shareholders analyze the financial information to determine the company’s overall financial strength and to see if the company can make wise spending decisions.
Some shareholders and investors will compare the company’s annual report to other companies to determine what is most beneficial for them. If one particular company is of interest, some investors will compare older financial statement information to see if the business is increasing its profits and income steadily over a longer period of time. * Regulatory Authorities: for ensuring that the company’s disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions. Regulators keep a close eye on companies’ financial statements, with a special focus on corporate audit reports. By law, publicly listed corporations must reveal their operating results at the end of each quarter and year. Accounting reports must conform to generally accepted accounting principles and international financial reporting standards. Federal regulators overseeing auditing and financial reporting processes include the U.S. Securities and Exchange Commission, Public Company Accounting Oversight Board and the Federal Reserve Board. At the state level, companies must abide by regulatory guidelines in effect in their industries. For example, a U.S.-based insurance company must adhere to National Association of Insurance Commissioners guidelines, in addition to other laws and regulations.
The external users of accounting reports run the gamut from regulators, the public and competitors to investors, traders and portfolio managers. These groups pay heed to corporate financial statements to understand how companies in the middle of the pack emulate the tactics of those ahead of the pack. External readers also use financial statement data to determine businesses that are making money and those that must exit the market or undergo significant reform to continue playing in it. Accounting is a very dynamic profession which is constantly adapting itself to varying needs of its users. Over the past few decades, accountancy has branched out into different types of accounting to cater for the different needs of the users.