Question

Give reasons as to why is it important for an external user to know the accounting policies and practices of a company? ( 10 marks)

Answer 1

The objective of financial statements is to provide information about the financial position, performances and cash flows of an enterprise that is useful to a wide range of users

All users of financial statements expect the statements to provide useful information to suit the common needs of most users

However they cannot and do not intend to provide all information that may be needed e.g. they do not provide non financial data even if they may be relevant for making decisions

Investors - analysis of performance profitability financial position of the company

Employees - knowledge of stability , continuity, growth

Suppliers - determination of credit worthiness

Customers - analysis of stability, profitability

Government - evaluation of entitys performance and contribution to social objectives

*users of financial statements depends upon the applicable accounting policies and procedures as they give the result of operations are true and fair and also they bother about the applicable financial reporting framework.