Users of Financial Statements Top 12 Users of Financial Statements

Employees want to know if the company has the ability to pay remuneration and benefits. Labor unions review the financial performance and condition of the company before making demands on salary increase, employment benefits, and other labor matters. Tax authorities use accounting information in determining taxes due from the business. Businesses pay different kinds of taxes and are computed in reference to different tax bases and different tax rules. Businesses are also required to submit reports to regulatory agencies such as the SEC.

• This is important because there are situations in which a purely financial analysis might lead to one decision, while considering nonfinancial information might lead to a different decision.
• This department assists management in making business decisions in a variety of ways by providing interim accounting information.
• Individuals make use of accounting information in the day-to-day affairs of managing their cash and bank balances, making investments, or deciding on whether to buy or lease a car or home.
• Lenders want to know if a business can pay for outstanding loans, and whether they have sufficient collateral to support the loans.

Lenders often asses the stability of the business as well as cash flows and profitability. They are particularly interested in the ability of a business to pay borrowings and the corresponding interests when they become due. External users are entities or individuals who do not participate in running or managing the business but are interested in the financial information of the company. Common computerized accounting systems include QuickBooks, which is designed for small organizations, and SAP, which is designed for large and/or multinational organizations. Also, being familiar with a common software package such as QuickBooks helps provide employment mobility when workers wish to reenter the job market. In the United States, publicly traded companies are required to submit Form 10-K annually and Form 10-Q every quarter to the Securities and Exchange Commission.

Characteristics, Users, and Sources of Financial Accounting Information

Governing bodies of the state, especially the tax authorities, are interested in an entity’s financial information for taxation and regulatory purposes. In general, the state would like to know how much the taxpayer makes to determine the tax due thereon. Vendors are the suppliers who supply something like raw material or other goods to the company that the company needs in their day to day operations. Lenders want to know if a business can pay for outstanding loans, and whether they have sufficient collateral to support the loans. Based on their review of a borrower’s financial statements, they may call a loan or be willing to extend additional funds. The government’s tax authorities examine traders’ financial statements, regulate their appropriate functions, and resolve tax and tax-related issues.

• They also study the income statement in particular, the earnings before interest, tax, depreciation, and amortization to be sure that the business earns enough income to cover its interest payments.
• This article has assessed the importance of financial statements to potential investors and creditors by using quantitative data in conjunction with a qualitative factor.
• For instance, the income statement can help determine whether a company is profitable or not, while the balance sheet provides a glimpse of a firm’s financial solidity.
• The annual report contains the independent auditor’s opinion as to the fairness of the financial statements, as well as information about the company’s activities, products, and plans.

For example, suppose a financial analysis indicates that a particular product is unprofitable and should no longer be offered by a company. If the company fails to consider that customers also purchase a complementary good (you might recall that term from your study of economics), the company may be making the wrong decision. For example, assume that you have a company that produces and sells both computer printers and the replacement ink cartridges. If the company decided to eliminate the printers, then it would also lose the cartridge sales. In the past, in some cases, the elimination of one component, such as printers, led to customers switching to a different producer for its computers and other peripheral hardware. In the end, an organization needs to consider both the financial and nonfinancial aspects of a decision, and sometimes the effects are not intuitively obvious at the time of the decision.

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That is, reviewing how the organization performed in the past can help managers and other employees make better decisions about and adjustments to future activities. General-purpose financial statements provide much of the information needed by external users of financial accounting. These financial statements are formal reports providing information on a company’s financial position, cash inflows and outflows, and the results of operations.

Government and Regulatory Bodies

This is especially important in such a global economy where many companies conduct business outside United States borders. Usually, the purpose of horizontal analysis is to detect growth trends across different time periods. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Accountants provide relevant accounting information to the public, which enables them to identify financial irregularities and therefore prevent and detect corruption.

Understanding Internal Financial Reporting

Investors who are looking for business opportunities can only make correct decisions based on high-quality accounting information. External users (secondary users) – If a user of the information is an external party and is not related to the business then he/she is considered as one of the external or secondary users of accounting information. Internal users (primary users) – If a user of the information is part of the business itself then he/she is considered tax benefits for having dependents 2020 as one of the internal or primary users of accounting information. Accounting is the language of business, it brings life to the otherwise lifeless business activities. It acts as a bridge between users of the information and the day to day transactions that occur inside a business. Government agencies want to know the financial condition and profits of a regulated business, which can impact the prices they will allow a firm to charge to its customers.

Employees

Creditors want to know if a company can pay its bills in a timely manner, and so will want to peruse the financial statements to determine the firm’s liquidity. An outcome of this examination can be a change in the amount of credit extended to a business. They will do so by reviewing the company’s financial statements and making an investment decision. In this article, we will learn in-depth about the top internal and external users of financial statements and much more. The Internal Revenue Service doesn’t review company financial statements, but the information on the profit and loss statement is incorporated into the company’s tax returns. If the company is publicly owned, the statements have to be reported on a quarterly and annual basis to the Securities and Exchange Commission.

Imagine playing a game blindfolded, with no idea of the rules, the score, or even the goalpost. This is exactly how running a business without understanding its financial statements could feel – a blindfolded game fraught with unpredictability. In the complex world of business, financial statements serve as the rulebook, the scoreboard, and the guiding light. They’re pivotal in providing a clear picture of a company’s financial health and the direction it’s heading. So, in this case, many business owners or shareholders consider external users of financial statements.