Ø Question: Explain the users of Financial Statement?

Ø Question: Explain the users of Financial Statement?

Financial Accounting

Accounting can be defined as an information system that provides information about the results of a business' performance and its economic position. The systematic recording, reporting, and analysis of financial transactions of a business. The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles. Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit.

Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently." There are different kinds of users of financial statements. The users of financial statements may be inside or outside the business. 

The users of financial statements use financial statements for a large variety of business purposes and their ability to understand and analyze financial statements helps them to succeed in the business world.

Classification of Users of Financial Statements

The users may be classified into internal and external users. Internal users refer to managers who use accounting information in making decisions related to the company's operations. External users, on the other hand, are not involved in the operations of the company but hold some financial interest. They may be classified further into users with direct financial interest – the owners, investors, lenders and creditors, and users with indirect financial interest – government, employees, customers and the others. The various users of financial statements are classified and detailed as follows: 

1. Internal Users 
The internal users of financial statements are individuals who have direct bearing with the organization. They may include:

Ø  Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. In small businesses, management may include the owners. In huge organizations, however, management is usually made up of hired professionals who are entrusted with overall responsibility of operating the business or a part of the business. They 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.

Ø  Owners or investors: for analyzing the viability and profitability of their investment and determining any future course of action. Stockholders of corporations need financial information to help them make decisions on what to do with their shares of stock (investments) – hold, sell, or buy more shares. Potential investors need information to assess the company's potential for success and profitability. In the same way, small business owners need financial information to determine if the business is profitable and whether to continue or drop it.

Ø  Employees: The financial reports or the financial statements are of immense use to the employees of the company for making collective bargaining agreements. Such statements are used for discussing matters of promotion, rankings and salary hike. Employees are interested in the company’s profitability and stability. They are after the ability of the company to pay salaries and provide employee benefits. They may also be interested in the company’s financial position and performance to assess the possibility of company expansion and career opportunities.

2. External Users
External users of accounting information include the following:

Ø  Creditor: for determining the credit worthiness of the organization. Terms of credit are set according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. The vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.

Ø  Government: The financial statements of different companies are also used by the government to analyze whether the tax paid by them is accurate and is in line with their financial strength. – Governing bodies of the state, especially the tax authorities, are interested in an entity's financial information for taxation and regulatory purposes. 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.

Ø  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.

Ø  General Mass and Media: The common people as well as media also make part of the users of financial statements. Anyone outside the company such as researches, students, analysts and others are interested in the financial statements of the company for varied reasons.