Financial Users Running header: FINANCIAL INFORMATION USERS

Why Companies Provide Financial Information and Who Uses It Your Name Your University Your Class Name/Number Your Teacher Date

Financial Users Why Companies Provide Financial Information Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users, according to Weygandt, Kieso, and Kimmel (2005, p. 4). Companies use financial statements and other financial data to communicate economic events and how such events drove corporate financial activities. Accountants use such information to formulate reports for users of financial information and communicate financial information to said users. The types of decisions made by the user dictates what information the user requires from the financial statements. The financial information provided by financial statements includes a corporate resources and claims against those resources, shareholder equity, and changes in assets and liabilities. Accountants must understand how financial information varies between internal users and external users and the characteristics of the financial information required by the different users of financial information. Who Uses Financial Information?

In developing financial reporting standards, standard setters presume that those who use the resulting information will have a reasonable knowledge of business and economic activities and be able to read a financial report (Financial Accounting Standards Board, 2006, p. 2). The objective of communicating financial information to users allows accountants to address the needs and interest of said users. The users of financial information vary and include (a) equity investors, (b) creditors, (c) suppliers, (d) employees, (e) customers, (f) governments, their agencies and regulatory bodies, and (g) members of the public. Such users are categorized as either internal users of financial information or external users of financial information.

Financial Users Internal Users Internal users of accounting information are managers who plan, organize, and run a business and include marketing managers and production supervisors (Weygandt, Kieso, and Kimmel, 2005, p. 5). Managers must understand financial information to answer such questions as Is cash sufficient to pay bills? and Which product line is more profitable? Accountants provide internal reports to management for comparison and forecasting needs; such examples include comparisons of operating alternatives, projections of long-term financial sustainability, and forecasts for annual cash needs. External Users Several types of external users of financial and accounting information exist and include investors and taxing authorities. Investors (owners) use accounting information to make decisions to buy, hold or sell stock (p. 6), while suppliers view the financial health of the organization to ensure timely repayment of credit extended to an organization. Other external users include equity investors, creditors, employees, customers, governments and their agencies and regulatory bodies, and the general public.

Equity investors are interested in the entitys ability to generate net cash inflows because their decisions relate to the amounts, timing, and uncertainties of those cash flows (FASB, p. 2). The entity investor is interested in the types of dividends or other cash distributions provided to investors and how prices of shares or other ownership interests fluctuate based on a companys ability to generate net cash inflows. Creditors include banks and other lending institutions that provide capital for a companys operations or to fund projects. Creditors are also interested in the current and future cash flows of an organization and views said entity as a source of cash in the form of interest,

Financial Users repayment of borrowings, and increases in the prices of debt securities (p. 2). The firm must

satisfy such research with the ability to earn satisfactory income and repay debts when said debts come due. Employees and the organizations that support said employees are interested in whether the company can pay for the services employees provide to the company. Stability, profitability, and employer growth are all key interests of employees and unions as these translate into the ability of the company to continue to pay wages and provide compensatory benefits, such as retirement and health benefits. Customers depend on a company to provide goods and services to them and are interested in the long-term profitability of the organization. Corporate longevity is not only the concern of corporate management and owners but also customers who depend on a product or service from said company. Dependence of products or services could cause hardship to consumers, especially business consumers, in providing their products or services to their core market. Customers are interested in whether a company will continue to honor product warranties and support its product lines (Weygandt, Kieso, and Kimmel, 2005, p. 7). Governments and their agencies and regulatory bodies are interested in the activities of an entity because they are in various ways responsible for seeing that economic resources are allocated efficiently (FASB, p. 3). The Securities and Exchange Commission and the Federal Trade Commission are examples of such regulatory agencies, as they need to know whether the company is operating within the rules dictated by these regulatory agencies. The IRS is a governmental agency that applies tax rules and guidelines companies must comply with in preparing financial statements and preparing tax returns.

Financial Users The final set of users requiring company financial information is the general public. The general public is interested on the contributions of companies on the local economy in the generation of employment opportunities, payment of taxes, and the provision of charitable

contributions. Members of the public are interested in trend analysis of financial information and recent news to determine if the company can continue to contribute to the local economy. Importance of Financial Information Companies provide financial information to users in the form of various financial statements, press releases, and other pertinent data. Such data is used by various users to determine creditworthiness, continued operations, and adherence to regulatory standards. Companies certainly benefit from the users of financial information and the accountant must ensure timely and transparent information to these users. Without such financial information, users of financial information could not provide companies with needed financial capital and could not depend on corporate forecasts and outlooks.

Financial Users References

Financial Accounting Standards Board. (2006). Conceptual Framework for Financial Reporting: Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information. Retrieved January 9, 2009, from the Web site: http://www.fasb.org/draft/pv_conceptual_framework.pdf Weygandt, J.J., Kieso, D.E., & Kimmel, P.D. (2005). Financial Accounting (5th Ed.). Hoboken, NJ: John Wiley & Sons, Inc.