There are several groups of people within a business that use its accounting information, each having different needs and objectives. These groups of users are noted below.
Management
The core internal users are the managers. They need detailed performance information about each segment of the business, so that they can make ongoing corrections and enhancements to the organization. Their objectives are to maintain a steady or increasing level of cash flow, while also maintaining a prudent level of debt risk. They may also need this information to make decisions about acquisitions or divestitures.
Owners
Investors use accounting information to determine their return on investment, based on the reported cash flows being generated by the business. Depending on the outcome, investors may alter their level of investment in the business, either selling from their current positions or acquiring additional shares from others.
Employees
If employees have access to accounting information (which is not always the case), they can use it to estimate the ability of the firm to pay them an adequate level of compensation, as well as to fund any pension plan that the organization offers them. This can result in decisions to remain with the firm or seek employment elsewhere.
Unions
Unions can use a firm’s accounting information to determine its level of profitability and debt load. This information is useful for deciding how hard to push for a wage and benefits increase in the next contract negotiations. If the company is reporting marginal results, then the union might be inclined to push less hard, and vice versa.
Learning Outcomes
- Identify users of accounting information
The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. There are three primary users of accounting information: internal users, external users, and the government (which is a specific form of an external user). Each group uses accounting information differently and requires the information to be presented differently.
Internal Users
External Users
The external users of accounting information fall into five groups; each has different interests in the company and wants answers to unique questions. The groups and some of their possible questions are:
- Prospective and current board members or investors. Has the company earned satisfactory income on its total investment? Should an investment be made in this company? Should the present investment be increased, decreased, or retained at the same level? Can the company install costly pollution control equipment and still be profitable?
- Creditors and lenders. Should a loan be granted to the company? Will the company be able to pay its debts as they become due?
- Employees and their unions. Does the company have the ability to pay increased wages? Is the company financially able to provide long-term employment for its workforce?
- Customers. Does the company offer useful products at fair prices? Will the company survive long enough to honor its product warranties?
- General public. Is the company providing useful products and gainful employment for citizens without causing serious environmental problems?
Government
The government is a separate type of external user that is also interested in a company’s performance, mainly for purposes of collecting the proper amount of tax, but also for other regulatory purposes. In fact, a single company may be reporting to several state and local governments and even to foreign governments, depending on where they are doing business.
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Financial Accounting: Tools for Business and Decision Making
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Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
Financial Accounting: Tools for Business and Decision Making
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