Financial statements are not necessarily used only by the company that releases them. Many external parties may have the interest to become the users of financial statements of a company. It is even more favorable to specify the users of the financial information first, as well as the judgment and decision they make, before shaping and executing the accounting process (Weetman, 2019).
The discrepancies between financial accounting and managerial accounting are based on the users of the information. Financial accounting is intended for external users, while managerial accounting is for internal users (Whitecotton, 2019). Thus, for external users, financial accounting needs to comply with the rules, such as generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) (Garrison, 2017). Standardized financial statements, such as Balance Sheet, Income Statement, and Statement of Cash Flows, are usually aimed at external users, and so it has standardized form to ensure objectivity, verifiability, and precision.
Internal managers and employees can also benefit from the financial statements. However, managers usually need more detailed information than those captured in financial reports (Whitecotton, 2019) which is in the scope of managerial accounting. Employees may have an interest in information about the stability and profitability of their employers, to ensure the ability of the company to provide remuneration and retirement benefits (Weetman, 2019). Those exact information may not be captured clearly in financial statements.
Aside from investors and analysts, some of the main users of the financial statements are lenders, regulators, trade creditors, and customers. Each of the users has a different intention in using the financial information.
External Users of Financial Statements
My company made a bank loan a while ago, and one of the requirements was to provide the company’s financial statements. Banks may require a company’s cash flow projections that show how it plans to repay the loan. Lenders are interested in information that enables them to assess the economic stability and vulnerability of the borrower, which will determine whether the loans and the interest will be paid when it’s due (Weetman, 2019). Financial statements may provide the information.
Lenders are concerned with the risk of losing money to borrowers who are unable to repay the loan, so the economic information of the borrower is very important. Based on the financial information of a business, they may demand some conditions or covenants about acceptable borrowing limits for the business.
Government and Their Agencies
Government agencies require companies’ financial information to regulate business activities, assess taxation, and establish national economic statistics (Weetman, 2019). Even though the regulation may be different in each country, the government’s treasury department usually collects taxes from companies based on profit or revenues calculated according to commercial accounting practices. That information is provided in the financial statements. Other government agencies may need business financial statements for other purposes.
Trade creditors are usually suppliers of goods and services that a company may owe money from. They are interested in information that facilitates them in deciding whether to sell to a company and to determine whether the amounts will be paid when it’s due. Usually, they have limited protection if the buyers fail due to insufficient assets to meet all liabilities (Weetman, 2019). The information in the financial statements is important for them to assess their buyers’ financial strength.
The closer relationship may be arranged as a partnership covenant. Both suppliers and buyers may depend on each other and want to assure that the number of goods and services can be delivered in time. This partnership arrangement usually depends heavily on trust and confidence, which may be obtained partly from the performance assessment of the financial statements.
They may also gain information from other trusted sources, such as trade journals, trade associations of a specific industry, or news on a trusted media channel. However, the financial statements of a business may provide evidence to confirm the information gained from those sources.
When a customer depends on a company’s supply of goods or services, they may develop an interest in information about the continuation of the business (Weetman, 2019). Customers may search for information from many other trusted sources, but financial statements usually provide hard evidence to confirm the information. From the financial statements, customers may be able to assess the reliability of the company in maintaining the source of supply.
Users of financial statements may come from various parties with various intentions. For the users explained above, and for the importance of their purposes, the government can make it mandatory for businesses to provide financial statements. Not only for the government and its agencies, financial statements are also important for lenders, trade creditors, and customers.
References Garrison, R., Noreen, E., & Brewer, P. (2017). Managerial Accounting (16th ed.). McGraw-Hill Education. Weetman, P. (2019). Financial and Management Accounting (8th ed.). Pearson Education. Whitecotton, S., Libby, R., & Phillips, F. (2019). Managerial Accounting (4th ed.). McGraw-Hill Education.