Question

Explain the usefulness of the concept of “profit” to users of accounting information.

Answer 1

Usefulness of the concept of “profit” to users of accounting information are mentioned below:

1. INVESTOR-Investors need to know how well their investment is performing. Investors primarily rely on the financial statements published by companies to assess the profitability, valuation and risk of their investment.

2.LENDERS: Lenders use accounting information of borrowers to assess their credit worthiness, i.e. their ability to pay back any loan.On a lighter note, borrowers can only get a loan from lenders if they can prove that they don’t need the money.

3. TAX AUTHORITIES: Tax authorities determine whether a business declared the correct amount of tax in its tax returns.Tax authorities also cross reference accounting information of suppliers and consumers in order to identify potential tax evaders.

4.CUSTOMER: Most consumers don’t care about the financial information of its suppliers.Industrial consumers however need accounting information about its suppliers in order to assess whether they have the required resources that are necessary for a steady supply of goods or services in the future. Continuity in supply of quality inputs is essential for any business.