Users Of Financial Statements And Their Purpose Of Examination Essay Samples

Introduction

As the business activities are expanding all across the globe, managers find it difficult to surpass the intense competition in the global marketplace. One of the pressures they face these days is the manner in which they communicate the business’ financial performance through the different statements they prepare. This is normally true for financial and accounting managers who are required to report the business activities while complying with global reporting standards.
Different users of financial statements of an organization include different stakeholders like investor (both existing and potential), financial institutions, government entities, suppliers/vendors, general public and competitors . They use their analysis of financial performance of any given entity under review which supports them in decision making process which is mostly influenced by cash and profit generating ability of an organization . These users do not examine or focus only on one financial statement. Instead, they analyse all financial statements while making their analysis.
Therefore, this research paper is written to identify different users of financial statements followed by the reason for which these users analyse financial statements. Different financial statements, which these users make analysis of, include income statement which gives an insight about revenue and income generation of the business as well as mentions the cost/expense management by the personnel . The balance sheet is also looked into by these users which shows them the category and volume business’s resources as well as depicts claims to them as liabilities and equity. The users also consider cash flow statement during their research analysis because it shows them the cash management activity throughout a given accounting year .

Discussion

In the field of accounting, financial statements are prepared with the sole objective of providing accurate information about the financial performance of an organisation over a period of time . This information is often of important use to varieties of users which helps them for arriving at most feasible economic decisions . The different users and the purpose they have are elaborated as follows:

Internal Users of Financial Statements

Internal users used financial statements with a different perspective and investigation objective in mind. These internal users generally include the management and employees of an organisation. In other words, internal users of financial statements are those who utilise accounting information to make decisions directly affecting operational activities of an organization. Different internal users are:

Managers or Owners

In every business, depending on it size and form, managers may either act as owners or they may the ones hired as agents with the responsibility to manage operations. Regularly, these stakeholders usually face number of economic decisions about things like purchase orders, cash and revenue generation and liquidity management etc. For this, they need to analyse the accounting information and financial statements for managing the company affairs by assessment of its financial position and make feasible decisions .

Employees

Financial Statements are used by employees to assess the stability as well as profitability of their organisation and its likely impact on their compensation and job security. They also use financial statements to measure the company’s ability to pay salaries on a regular basis and reward employees with numerous employment benefits. As users, employees use financial statements to make bargaining agreements with their employers and to discuss sensitive matters such as career opportunities, salary hike, performance rankings and promotion .

External Users of Financial Statements or Records

Outside parties which use the financial statements for their performance analysis often include vendors/suppliers, potential investors and government entities etc. On the other hand, external users are those not directly involved in company operations but hold some financial stake into the business. These users can be categorised into users having direct stake – investors, creditors, owners; and those having indirect financial hold – customers, employees, government and the others. Basically, the external users reflect those parties use financial statements for assessing the financial strength of an organisation which helps these investors in making logical investment decisions . These parties, together with their examination objectives are summarised in the following manner:

Existing Shareholders and Potential Investors

Current equity investors analyse financial statements to decide whether to buy, hold or sell their shares for capital gains while requiring high returns against capital invested in the business. Examining the financial statements as users, shareholders of outstanding stock make risk and return assessment of the business on which they base their investment decisions.
Additionally, potential investors, as users, analyse financial statements of a given company for assessing its profit generation capacity and success potential. Some investors may use financial statements to make decision of whether to invest into the business or withdraw from current investment. For dividend and capital gains, potential investors may analyse trends in profit making and can sort out various risks associated with investing in a given public company.

Financial Institutions as Lenders

This group includes various banks and other institutions which lend money to the public company as debt. They analyse or use financial statements to measure its capacity to repay its liabilities or fixed interest obligations/payments when the deal matures. By doing so, banks and other financial institutions gauge the liquidity strength and solvency of the business depending on its existing financial flexibility which helps them decide whether to grant any credit or loan to business or not.
In other words, banks and other financial institutions examine the financial statements for identification of any possibility of counterparty, bankruptcy or default risk by assessing the overall the financial health of any company. These activities and uses of financial statements help their lending decision to be based on sufficient liquidity and asset base. Using financial statements, financial institutions like banks can decide whether to provide debt security to the company support it working capital management or not .

Government Entities

These parties use financial statements for investigating if the tax return is in alignment with the declared amount. By using financial statements, Government Entities keep track of financial and non-financial progress of companies from different sectors. Government Entities use financial statements because they assess the financial strength of the business under examination. As tax authorities, these entities see if the tax paid by the company is accurate and in accordance with state’s regulations. In all, Government Entities analyse financial statements to calculate tax obligation depending on the income generated by the company.

Suppliers, Creditors or Vendors

Suppliers provide a short-term credit to companies by relaxed terms to delay their purchases. They use financial statements to assess the creditworthiness and liquidity strength of their client to determine whether to supply raw materials on further credit or not. Vendors or suppliers, short-term creditors, use and analyse financial statements to gauge the repayment ability of the company to see if they will be repaid against their credit or not. Depending on this information, as dictated by financial information, suppliers set credit terms and duration accordingly.

Competitors

They use the financial statements of their business rivals to compare and measure their financial and non-financial performance over a certain period. Using the financial statement information, competitors learn and design their business strategies from rivalry for brining improvement in their competitiveness and capture more market leadership.

General Public

This party is generally interested to use and analyse financial statements to measure and identify the likely impact of business operations on the environment, local community and overall economic setup. General public may include research analysts and students etc who use financial statements to serve their research and academic purposes.

Conclusion

After a careful analysis and identification of different users of financial statements and their purpose of investigation, it may be concluded that though these statements are prepared by a single entity yet they are analysed by numerous parties in an equal but completely different manner from one another. Therefore, it is necessary that these financial statements should be accurate and must be free from any error or material misstatement. This could be ensured by internal and external audit which involves independent examination of financial statements followed by judgment on their accuracy and correctness. The role of an auditor is really of critical importance in this regard.

References

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