This is how Financial Accounting Information is used by stakeholders – Here are users of financial accounting information. In fact, variety of stakeholders use financial accounting information for different purposes. As a matter of fact, existing entrepreneurs and potential entrepreneurs use financial information for various reasons. Explained in this post are users of accounting information and their needs. These are also classified into internal and external users of accounting information.
Our Focus:
Therefore are focus here is to highlight the users of financial accounting information. By this we intend to educate our young entrepreneurs on the usage of financial accounting information. For this, we have listed below other related topics for your complete information understanding. Just click to read.
- How non-accountant CEOs should understand Accounting Equation,
- How non-accountant entrepreneurs understand Accounting Debit and Credit Rules,
- Free Accounting Basics for Non-Accountant CEOs:
- How entrepreneurs see Accounting Circle and
- Accounting Definition – Accounting basics
- Users of Financial Accounting Information
- Basic accounting Concepts and Principles
- The Rules of Debit and Credit
- Double Entry Bookkeeping System
- Accounting Cycle, i.e., analyzing, recording, classifying, summarizing and interpreting
Users of Financial Accounting Information
Check out the following! Are you one of them? They are Users of Financial Accounting Information
Owners/Shareholders:
Can we answer this question. How do business owners use financial information? Business Owners use the financial information to assess the financial performance of their businesses. This enables them make decisions such as whether or not to purchase additional stock, sell existing stock, or maintain the current level of stock ownership. Or whether or not to continue or discontinue part of the business. Again, are make or buy decisions. Acquire or rent/lease certain equipment in the production of goods.
Managers:
Managers use accounting information to plan and evaluate the company performance and to manage risks. Again, managers set a realistic budget and identify the need for funding using the financial accounting information. Therefore, Financial Information can be used by managers to track performance, budgets, and other metrics, and as tools to make decisions, motivate teams, and maintain a big-picture mindset.
Prospective Investors:
Now, how do prospective investors use accounting information? As a matter of fact, prospective investors with strong accounting backgrounds use financial reports to identify key risk areas. These can point to potential losses in asset values. In addition, investors use financial information to calculate financial ratios. Financial ratios assist in estimating a company’s liquidity and default risks.
Creditors, Bankers, and other Lending Institutions:
Furthermore, creditors such as banks, suppliers and others use financial information to outline asset values. They also use it for a short- and long-term debt assessment. In fact, lenders get a better sense of a company’s creditworthiness through financial accounting information. Therefore, Creditors use accounting information to decide whether to lend money to a business and to evaluate a company’s ability to make the loan payments.
This is how Financial Accounting Information is used
Government:
Now, how does the government use accounting information? As a matter of fact, Federal and State Governments require tax returns and other documents often prepared by accountants. So, various Government agencies and departments like Registrar of Companies, Company Law Board and Tax Authorities, etc. use accounting information. These re required for tax assessment. It is also used in evaluating how well various businesses re operating under law related requirements.
Employees:
Employees are part of the internal users of financial information. These are people within a business organization who use financial information. These include owners, managers, and employees.
As a matter of fact, employees use the accounting information to find out the financial health of an organization. They also use it to assess the amount of sales and profitability of business to determine their job security. They so determine the possibility of future remuneration, retirement benefits and employment opportunities.
Check out for financial accounting statements here
Regulatory Agencies:
The first class of regulatory bodies are those concerned with regulation accounting information preparations and presentations. Thus, such Regulation and regulatory agencies serve as external control mechanisms for financial accounting statements. In fact, they ensure that the financial statements provide a fair view of the company’s operating performance. And that the financial information is free of any unethical practice and suitable for all stakeholders’ needs.
Th second class are those who regulate the organizations producing the financial accounting information. For instance, the central bank watches the financial information or statements from the various banks. Such regulatory agencies are the users of accounting information and financial statements. So, they use the information for various reasons. For instance, they use the information to verify the state levies and taxes paid. These information also help them to understand the industry trends, statistics, and measure of GDP, etc.
Researchers:
Researchers use financial accounting information for variety of reasons. Even in the academic worl, several reasons are there to look into in a financial accounting information. Investor researchers and internal control researchers and anlayists use the financial statement information for forecasting profitability for two objectives: (i) to generate improved forecasts of profitability and accurate estimates of firm value; and (ii) to identify market inefficiencies with respect to financial statement information.
Furthermore, as stated above, it helps researchers to understand the industry trends, statistics, and measure of GDP, etc. Financial accounting information is everything to financial and economics researchers.
This is how Financial Accounting Information is used
Customers/Clients:
Customers can be any of the above listed users already. So, their needs vary. Therefore, Banks or lending institutions may use accounting information to guide decisions such as whether to lend or how much to lend a business. Investors will also use accounting information to guide investment decisions.
But Customers have interest in the accounting information for quit a different thing altogether. In fact, they want to assess the financial position of a business for business continuity. This is very important to them especially when they have a long term business involvement with the entity. Therefore, the financial accounting information will enable them assess how they can maintain a steady source of business. They re interested in the perpetuity of the organization.
Internal and External users of Financial Accounting information:
Just we hinted in our first paragraph, the above enumerated users can still be classified into Internal and External users. So, some of the ways internal users employ accounting information include the following:
- Assessing how management discharged its responsibility towards protecting and managing the company’s resources
- Shaping decisions as to when to borrow or invest or lend company resources
- Shaping decisions as to how to go about expansion or downsizing programs.
For external users, some of the uses for financial accounting information include;
- Stockholders who have the rights to know how a company is managing its resources
- Federal and State Governments require tax returns and other documents. These re documents prepared by accountants
- Banks or lending institutions may use accounting information to guide decisions. These could be as to whether to lend or how much to lend a business
- Investors will also use accounting information to guide investment decisions
This is how Financial Accounting Information is used
Characteristics of Financial Accounting Information:
With reference to our highlights in the first paragraph, financial accounting information have qualities. These are their characteristics which are very relevant for users of financial accounting information. This is because if any information is not material, it’s a waste of time checking it. So, check out these characteristics.
- Relevance – information to be used must be relevant for the usage.
- Reliability – Information must be verifiable. This is because non-verifiable information are not reliable
- Comparability – This is important for trend and industry analysis.
- Understandability – Information to be used must be understandable otherwise it can not be verifiable..
- Timeliness – Information must also be timely. With the rate of information in recent time, two-year old figures may not be reliable again.
- Cost-benefit – This is an issue of materiality. Except for other reasons like legalism on issues, it may be wasteful to spend N200,000.00 to search or investigate an item worth N15,000.00
- Verifiability – As hinted above, verifiability means that such figures are factual and reliable.
- Neutrality – This defines the unbiases in the production of the financial accounting information. It means that none of the information users is favored in the values and information presented.
- Completeness – finally, is completeness. In actual fact, an uncompleted information lacks all the characteristics listed above.
Related Posts:
These are part of our series of researches on this subject matter. This series centres on the usefulness of accounting information by non-accountant CEOs and entrepreneurs. Can you click to read them to support your knowledge of how Financial Accounting Information is used.
- How non-accountant CEOs should understand Accounting Equation,
- How non-accountant entrepreneurs understand Accounting Debit and Credit Rules,
- Free Accounting Basics for Non-Accountant CEOs:
- How entrepreneurs see Accounting Circle and
- Accounting Definition – Accounting basics
- Users of Financial Accounting Information
- Basic accounting Concepts and Principles
- The Rules of Debit and Credit
- Double Entry Bookkeeping System
- Accounting Cycle, i.e., analyzing, recording, classifying, summarizing and interpreting
This is how Financial Accounting Information is used
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Summing Up on how Financial Accounting Information is used
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