Friday, October 28, 2011

Who uses financial statements?

Accounting information is used by many people, both as individuals and in organisations. To get a feel for the purpose of accounts it is useful to classify these users into groups, and to look at the reasons why they use accounts and what they hope to get from them.
Any classification of this sort is somewhat arbitrary, and many users fall into more than one classification. However, the following groups are commonly recognised as having particular needs for accounting information:

(a) The investor group. This group includes both existing and potential owners of shares in companies. They require information concerning the performance of the company measured in terms of its profitability and the extent to which those profits are to be distributed to shareholders. They are also interested in the social/economic policies of the company so that they may decide if they wish to be associated with such an organisation.

(b) The lender group. This group includes both existing and potential providers of secured or unsecured, long- or short-term loan finance. They require information concerning the ability of the organisation to repay the interest on such loans as they fall due; and the longer-term growth and stability of the organisation to ensure that it is capable of repaying the loan at the agreed time. In addition, if the loan is secured, the value of the appropriate secured assets is important as a means of recovering the amount due.

(c) The employee group. This group includes existing, potential and past employees. They require information concerning the ability of the organisation to pay wages and pensions today. In addition, they are interested in the future of the organisation because this will affect their job security and future prospects within the organisation.

(d) The analyst/adviser group. This group includes a range of advisers to investors, employees and the general public. The needs of these users will be similar to those of their clients. The difference is, perhaps, that in some instances, the members of this group will be more technically qualified to understand accounting reports.

(e) The business contact group. This group includes customers and suppliers of the organisation. Customers will be concerned to ensure that the organisation has the ability to provide the goods/services requested and to continue to provide similar services in the future. Suppliers will wish to ensure that the organisation will be capable of paying for the goods/services supplied when payment becomes due.

(f) The government. This group includes taxation authorities, and other government agencies and departments. The taxation authorities will calculate the organisation’s taxation liability based upon the accounting reports it submits to them. Other departments require statistical information to measure the state of the economy.

(g) The public. This group includes taxpayers, consumers and other community and special interest groups. They require information concerning the policies of the organization and how those policies affect the community. The public is increasingly interested in environmental issues.

(h) Internal users. The management of the company require information to assist them in the performance of their duties. Three different levels of management can be identified:

Strategic. This is the level of management found at the top of organisations. In a commercial organisation it is referred to as the board of directors. These people require information to assist them in decisions affecting the long-term future of the organisation.

Tactical. This is often referred to as middle management. These people require information to assist them in monitoring performance and making decisions to enable the organisation to achieve its short- to medium-term targets.

Operational. This is the level of management responsible for decisions concerning the day-to-day activities of the organisation. It is common for the information provided to them to be quantified in non-monetary units, such as hours worked, number of components produced, etc.

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