There are many users of accounting information who are interested in the financial statements of companies as they rely on the statements to make better financial decisions. The users can either be internal or external to the organisation. Depending on the type of business, there are sometimes different users. For example, one user of Sainsbury’s financial statement are shareholders but one user of LeSoCo’s financial statement is Board of Directors.
In this report, I will be justifying the accounting conventions and regulations used to ensure that the financial statement meets their users’ needs.
Internal (Primary) Users Management: These are the day-to-day decision makers and they need to know how the business is performing financially and
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This means the credit worthiness of companies are assessed using customers’ financial position. Creditors can be suppliers and lenders such as banks.
Tax Authorities: Through the financial statement, tax inspectors are able to calculate the taxes payable by the company. Investors: Investors can either be potential or existing ones. For existing investors, they are interested in the performance of the company as they expect reasonable return on their investment but for potential investors, they get to know whether or not to invest their money into the business.
Customers: They are the people who shop and regularly visit the company. They assess the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.
Regulatory Authorities: The financial statement help accounting authorities to ensure that the company's disclosure of accounting information is in accord with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.
Accounting Users
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This means that the different users receive the same statements, irrespective of their purpose behind them. Since all the users of the accounting information are given the same income statement and statement of financial position, they have to believe the concepts and assumptions upon which the financial statements are based.
Furthermore, the financial statements provide the basis for measurement that is generally acceptable by the different users. This means objectivity is important when preparing the financial statements because all transactions are based upon a factual occurrence.
The financial statements need to meet two qualitative characteristics, namely, relevance and reliability. The statements must be relevant to the decision making process of the users and make an impact on the economic decisions by making comparison with the past, present or future occurrences. For the information to be useful, it must be reliable too. This means the statements should be free from material errors and also contain all the necessary explanations and
Financial Statements are often used to evaluate the financial position of a company. Through the analysis investors can determine the profitability of a company and decide whether to fund money into that business. The financial statements are comprise of income statement, cash flow statement and balance sheet, each of these provides useful information of earning and expenses, of cash flows, and of assets and debts.
"The Framework states that the objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions."
CLASSIFICATION AND UNDERSTANDABILITY- FINANCIAL INFORMATION IS APPROPRIATELY PRESENTED AND DESCRIBED AND DISCLOSURES ARE CLEARLY EXPRESSED .
One of the most important factors is reliability of financial statements. Reliability is further ensured by audit of financial statements. At last but not least, financial statements should be made in a comparable format either with previous periods or with the competitors.
When organizations present financial statements for review, the information contained in the statements should be appropriate and clear enough as to enable evaluators or auditors of the information to make accurate estimations of the presenting organization’s financial status.
Internal users (managers, officers, internal auditors, consultants, budget officers, and market researchers) make the strategic and operating decisions of a company.
The objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions ("The Framework for the Preparation and Presentation of Financial Statements").
The information reflected in the financial statements actually is expected to be of high quality and useful to support the quality decision-making of market stakeholders due to the far-reaching and very costly consequences. It is important in this context to properly identify and discuss the user needs and thereby we refer to the actual requirements of all information users amongst them the management, which uses the financial information to steer, regulate and co-ordinate the business.
Financial statements of the company are significant for the investors who would like to venture into the business operation. It gives them the insight whether the business is making profits or it is doomed to fail;
General Purpose Financial Reports can be defined as a financial report which is made with the intention to meet the need of information common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs (Statement of accounting concept – 2, Page – 5, paragraph – 4). In simple words, the users who do not have necessary power to demand financial statements from a company specifically depends on the information given in the general purpose financial reports. Under the Conceptual Framework released in 2010, the primary users of the financial reports are mentioned as
Accounting is specifically “a system by which economic information is identified, recorded, summarized and reported for the use of decision makers”; however, accounting involves interpretation and analyzing of all financial information, including taxing, personal financial information and investment (Alba, Bathija, & Thonton, 2005). Accounting is defined as the language of business, in that it specifically records the financial data that is required for businesses to operate both efficiently and effectively. Modern accounting includes
A financial statement is a legitimate record of the financial activities of a business, person, or other entity. On the other hand, a person, group or organization that has interest or concern in an organization is known as its stakeholder. Stakeholders are one kind of owner for an organization.
Financial statements, also known as financial reports, record the financial activities of a business in short and long term. The four financial statements are: balance sheet, income statement, statement of retained earnings, and statement of cash flows. A balance sheet reports the assets, liabilities, and net equity on a company. An income statement reports income, expenses, and profits on a company. A statement of retained earnings shows a company 's changed retained earnings. The statement of cash flows shows a company 's cash flow activities, such as operating investing, and financing activities (“Financial statements”, 2007, para.1). Financial statements are very important to a company.
A company prepares financial statement to provide information about its financial position and performance. This information is in turn used by a wide range of stakeholders (such as investors, banks, customers, suppliers etc) in making economic decisions with respect to respective economic interest in the company. Typically, in terms of ownership by investment in shares of the company, shareholders though own the company but do not manage it. Therefore, the shareholder and other such stakeholders to get comfort in taking sound decision need independent assurance from the auditors that the financial statements reflect true and fair view of the company affairs in all material respects. Hence, in order to enhance the level of
The financial statements are very useful to all this group of user. Explain each of them;