Lecture 3 Users of Accounting Information PDF

LECTURE – 3 Various users of fi nancial information and their requirement for fi nancial statements Relevant News LECTURE OUTCOMES Clarity about various users and their needs of Accounting information ...

LECTURE – 3 Various users of fi nancial information and their requirement for fi nancial statements Relevant News LECTURE OUTCOMES Clarity about various users and their needs of Accounting information  Owner Internal Manager Employee Investors Users Lenders Suppliers Customers External Tax Authorities Government Auditor Public  Owners Internal Manager Employee Investors Users Owners Owners need to assess how well Lenders their business is performing. Financial statements provide Suppliers information to owners about the profitability of the overall Customers business as well as individual External Tax products and geographic Authorities segments. Government Auditor Public  Owners Owners are also interested in Internal Manager knowing how risky their business is. Employee Accounting information helps owners in assessing the level of Investors Users stability in business over the years and to what extent have Lenders changes in economic factors affected the bottom line of the Suppliers business. Such information helps owners to Customers decide if they should invest any External Tax further in the business or if they Authorities should use their financial resources elsewhere in more Government promising business ventures. Auditor Public  Owner Internal Manager Employee Investors Users Managers Lenders Managers need accounting information to plan, monitor and Suppliers make business decisions. Managers need to allocate the Customers financial, human and capital External resources towards competing Tax Authorities needs of the business through the budgeting process. Government Auditor Public  Owner Internal Manager Preparing and monitoring budgets effectively requires Employee reliable accounting data relating to the various activities, Investors processes, products, services, Users segments and departments of Lenders the business. Management requires accounting Suppliers information to monitor the performance of business by Customers comparison against past External performance, competitor Tax Authorities analysis, key performance indicators and industry Government benchmarks. Auditor Public  Owner Internal Manager Employee Managers rely on accounting data to form their business Investors decisions such as investment, Users financing and pricing decisions. Lenders In case of investment decisions for example, managers would Suppliers require the return-on- investment calculation of a Customers proposed project supported by External reliable estimates of the costs Tax and revenues. Authorities Government Auditor Public  Owner Internal Manager Employee Investors Users Employees For the employees operating in Lenders the finance department, using accounting information is usually Suppliers part of their job description. This includes for example preparing Customers and reviewing various financial External Tax reports such as financial Authorities statements. Government Auditor Public  Owner Internal Manager Employee Investors Employees are interested in Users knowing how well a company is Lenders performing as it could have implications for their job security Suppliers and income. Many employees review Customers accounting information in the External annual report just to get a better Tax Authorities understanding of the company’s business. Government Auditor Public  Owner Internal Manager Employee In recent years, the increase in number of shares and share Investors Users options schemes for employees particularly in startups has Lenders fostered a greater level of interest in accounting Suppliers information by employees. Moreover, potential employees Customers are also interested to learn about External the financial health of the Tax Authorities organization they aspire to join in the future. Government Auditor Public  Owner Internal Manager Employee Investors Users Investors Lenders Investors need to know how well their investment is performing. Suppliers Investors primarily rely on the financial statements published Customers by companies to assess the External Tax profitability, valuation and risk of Authorities their investment. Government Auditor Public  Owner Internal Manager Employee Investors Users Lenders Investors use accounting information to determine Suppliers whether an investment is a good fit for their portfolio and whether Customers they should hold, increase or External decrease their investment. Tax Authorities Government Auditor Public  Owner Internal Manager Employee Investors Users Lendors Lenders use accounting Lenders information of borrowers to assess their credit worthiness, Suppliers i.e. their ability to pay back any loan. Customers Lenders offer loans and other External Tax credit facilities on terms that are Authorities based on the assessment of Government financial health of borrowers. Auditor Public  Owner Internal Manager Good financial health is indicated by the borrower’s ability to pay Employee its liabilities on time, high profitability, substantial Investors securable assets and liquidity. Users Poor liquidity, low profitability, Lenders lack of assets that can be secured and an inability to pay Suppliers liabilities on time demonstrate poor financial health of Customers borrowers. External On a lighter note, borrowers can Tax only get a loan from lenders if Authorities they can prove that they don’t Government need the money. Auditor Public  Owner Internal Manager Employee Investors Users Lenders Suppliers Just like lenders, suppliers need Suppliers accounting information to assess the credit-worthiness of its Customers customers before offering goods External Tax and services on credit. Authorities Government Auditor Public  Owner Internal Manager Employee Investors Users Some suppliers only have a handful of customers. These Lenders customers could be very large businesses themselves. Suppliers Suppliers need accounting information of its key customers to assess Customers whether their business is in good External Tax health which is necessary for Authorities sustainable business growth. Government Auditor Public  Owner Internal Manager Employee Investors Users Lenders Customers Suppliers Most consumers don’t care about the financial information of its Customers suppliers. External Tax Authorities Government Auditor Public  Owner Internal Manager Employee Investors Users Industrial consumers however need accounting information Lenders about its suppliers in order to assess whether they have the Suppliers required resources that are necessary for a steady supply of Customers goods or services in the future. External Tax Continuity in supply of quality Authorities inputs is essential for any Government business. Auditor Public  Owner Internal Manager Employee Investors Users Lenders Tax Authorities Suppliers Tax authorities determine whether a business declared the Customers correct amount of tax in its tax External returns. Tax Authorities Government Auditor Public  Owner Internal Manager Employee Investors Occasionally, tax authorities Users conduct audits of the tax returns Lenders filed by businesses in order to verify the information with the Suppliers underlying accounting records. Tax authorities also cross Customers reference accounting information External of suppliers and consumers in Tax Authorities order to identify potential tax evaders. Government Auditor Public  Owner Internal Manager Employee Investors Users Government Government defines and Lenders monitors accounting thresholds such as sales revenue and net Suppliers profit to determine the size of each business for the purpose of Customers ensuring that it complies with External Tax the relevant employee, Authorities consumer and safety regulations. Government Auditor Public  Owner Internal Manager Employee Investors Auditors Users External auditors examine the Lenders financial statements and the underlying accounting record of Suppliers businesses in order to form an audit opinion. Customers Investors and other stakeholders External rely on the independent opinion Tax Authorities of external auditors on the accuracy of financial statements. Government Auditor Public  Owner Internal Manager Employee Investors Users Public Lenders General public may also be interested in accounting Suppliers information of a company. These could include journalists, Customers analysts, academics, activists External and individuals with an interest Tax Authorities in economic developments. Government Auditor Public MCQ ◦Accounting furnishes data on ◦A) Income and cost for the managers ◦B) Financial conditions of the institutions ◦C) Company’s tax liability for a particular year ◦D) All the above ◦Accounting furnishes data on ◦A) Income and cost for the managers ◦B) Financial conditions of the institutions ◦C) Company’s tax liability for a particular year ◦D) All the above Users of accounting information include ____________. ◦A) Tax Authorities ◦B) Investors ◦C) Creditors ◦D) All of these Users of accounting information include ____________. ◦A) Tax Authorities ◦B) Investors ◦C) Creditors ◦D) All of these ◦Which of the following user groups required the most detailed financial information? ◦(a) Lenders ◦(b) Investor and potential investors ◦(c) Government agencies ◦(d) The management ◦Which of the following user groups required the most detailed financial information? ◦(a) Lenders ◦(b) Investor and potential investors ◦(c) Government agencies ◦(d) The management ◦Which of the following statement is true about purpose of accounting? ◦(a) The purpose of accounting provide information to manager ◦(b) Accounting purpose gives quantitative information to economic decision makers ◦(c) Provision of base for decision making is purpose of accounting ◦(d) All of above statement are true regarding purpose of accounting ◦Which of the following statement is true about purpose of accounting? ◦(a) The purpose of accounting provide information to manager ◦(b) Accounting purpose gives quantitative information to economic decision makers ◦(c) Provision of base for decision making is purpose of accounting ◦(d) All of above statement are true regarding purpose of accounting THANK YOU