Question

Who are the users of financial information, which financial statement would they be interested in and why? You may use an example to clarify your point.

Answer 1

Financial information is useful when it has fundamental characteristics of relevance and represents faithfully what it purports to represent. The usefulness of financial information is enhanced when it can be compared, verifiable, timely and understandable. It's users can be internal as well as external. Internal users are employees who needs financial information while making decisions related to the company's operations. On the other hand, external users are not involved in the company's operations however hold some financial interest.

-- Owners and investors: They need financial information to make decisions whether or not to invest in the business. For example: Has the organisation earned satisfactory revebue on its total investment? Should the current investment be decreased, increased, or retained at the similar level? Should an investment be made in the orgsanisation?

-- Lenders: The funds lenders such as banks and other financial institutions are interested in the ability of company for making payment to the liabilities upon maturity. For example: Will the organisation be in a position to pay its debts as they become due?

--Trade creditors or suppliers: They are keen to know the ability of company to pay obligations when it become due. For example: Creditors study company's financial statements to know the sustainability and liquidity of a company

-- Government: Governing bodies are interested in financial information ofan an entity's for purpose of taxation and regulatory. For example: Taxes will be calculated and imposed on the results of operations and other tax bases

-- Employees: They are keen in profitability and stability of a company to assess expansion possibilities and career development opportunities in the company. For example: Does an organsiation have the ability to pay increased salaries? Is the organisation financially able to give long-term employment for its workforce?

-- Management: Mangement requires financial information while making decisions in operating the business. For example: The management regularly face economic decisions – How many supplies will we purchase? How did we perform last year? Do we have adequate cash? Did the company meet the goals? All such questions and business decisions needs analysis of accounting information.

--Customers: They study the financial statements before making major purchases. For example: Will an organisation survive long enough to honor its goods warranties?

Answer 2

There are several users of financial information, each with their own specific interests and needs. The following are some of the key users of financial information:

1. Investors and Shareholders: Investors and shareholders are interested in the financial statements to assess the financial health and performance of a company. They primarily focus on the income statement and the balance sheet. By analyzing these statements, investors can make informed decisions regarding buying, holding, or selling shares of the company. For example, if an investor sees that a company has consistently high profits and strong financial stability, they may be more inclined to invest in that company.

2. Creditors and Lenders: Creditors and lenders, such as banks and financial institutions, use financial statements to evaluate the creditworthiness and repayment capacity of a company. They are particularly interested in the balance sheet and cash flow statement. By reviewing these statements, creditors can assess the company's assets, liabilities, and cash flow patterns to determine the level of risk associated with extending credit or lending money. For instance, if a company has significant assets and generates consistent cash flow, it may be more likely to receive favorable loan terms.

3. Employees: Employees are interested in the financial statements, especially the income statement and the cash flow statement, as they provide insights into the company's profitability, stability, and ability to generate cash. Employees may use this information to evaluate the financial health of the organization, assess potential job security, and negotiate compensation packages. For example, if employees see that a company is consistently profitable and has positive cash flow, they may feel more secure in their jobs and be more inclined to negotiate for higher salaries.

4. Government and Regulatory Authorities: Government agencies and regulatory authorities use financial statements to ensure compliance with laws and regulations. They may be interested in various financial statements depending on the specific regulations and reporting requirements of the industry. For instance, tax authorities may focus on the income statement and balance sheet to verify the accuracy of reported taxable income.

5. Management: Internal users, including the company's management team, use financial statements to monitor and evaluate the company's financial performance, identify areas of improvement, and make strategic decisions. They rely on all financial statements, including the income statement, balance sheet, cash flow statement, and statement of changes in equity, to gain a comprehensive understanding of the company's financial position and performance. For example, management may analyze the income statement to assess the profitability of different product lines and make decisions regarding resource allocation and cost management.

It is important to note that these user groups may have overlapping interests in financial statements, but their specific focus and analysis may differ based on their roles and objectives.