Question

List five users of financial accounting information and explain the significance of this information for each user and/or what type of decisions that user would be making related to the financial statements.

Answer 1

Answer :

The users of accounting information include

A) Owners and investors

B) Management

C) Lenders

D) Trade creditors

E) Government

The informantion needs for each users are as follows -

1. Owners and investors - Stockholders of corporations need financial information to help them make decisions on what to do with their investments (shares of stock), i.e. hold, sell, or buy more.

Prospective investors need information to assess the company's potential for success and profitability. In the same way, small business owners need financial information to determine if the business is profitable and whether to continue, improve or drop it.

2. Management - In small businesses, management may include the owners. In huge organizations, however, management is usually made up of hired professionals who are entrusted with the responsibility of operating the business or a part of the business. They act as agents of the owners.

The managers, whether owners or hired, regularly face economic decisions –How much supplies will we purchase? Do we have enough cash? How much did we make last year? Did we meet our targets? All those, and many other questions and business decisions, require analysis of accounting information.

3. Lenders - Lenders of funds such as banks and other financial institutions are interested in the company’s ability to pay liabilities upon maturity (solvency).

4. Trade creditors - Like lenders, trade creditors or suppliers are interested in the company’s ability to pay obligations when they become due. They are nonetheless especially interested in the company's liquidity – its ability to pay short-term obligations.

5. Government - Governing bodies of the state, especially the tax authorities, are interested in an entity's financial information for taxation and regulatory purposes. Taxes are computed based on the results of operations and other tax bases. In general, the state would like to know how much the taxpayer makes to determine the tax due thereon.