Examples of Internal and External Users of Financial StatementsAdmin
Thank you for reading the CFI`s Guide to Internal and External Financial Reporting. To help you become a top-notch financial analyst and get the most out of your career, these additional resources will be very useful to you: there are other external users, for example; Trade unions, customers and consumers, suppliers, SECs, tax authorities, chambers of commerce, press, competitors, auditors, etc. As you have learned, management accounting information uses both financial and non-financial information. This is important because there are situations where a purely financial analysis can lead to one decision, while the review of non-financial information can lead to another decision. Suppose a financial analysis shows that a particular product is not profitable and should no longer be offered by a company. If the company does not take into account the fact that customers also buy a complementary good (you may remember this term from your business studies), it may be that the company makes the wrong decision. Let`s say you have a company that manufactures and sells both computer printers and replacement ink cartridges. If the company decided to eliminate printers, it would also lose cartridge sales. In the past, eliminating a component, such as printers, has sometimes led customers to switch to another manufacturer for their computers and other peripherals. Ultimately, an organization must consider both the financial and non-financial aspects of a decision, and sometimes the implications are not intuitively obvious at the time of the decision. Figure 1.3 provides an overview of some of the differences between funding and control. Any person interested in the financial information of an economic entity outside the administrative radius of an economic entity is defined as an external user.
In the United States, publicly traded companies must file Forms 10-K and 10-Q with the Securities and Exchange Commission on a quarterly basis. The information will be made available to the public for investors who need the latest financial information for a particular company listed on a public stock exchange. There are two main reasons why external financial reports are produced. The first reason is to inform the public about the financial health of the company. Listed companies are required by law to publish their financial performance information annually. As you have learned, business accounting information differs from financial accounting information in several ways. Accountants use formal accounting standards in financial accounting. These accounting standards are called generally accepted accounting principles (GAAP) and are the common rules, standards and procedures that publicly traded companies must follow when preparing their financial statements.
The aforementioned Financial Accounting Standards Board (FASB), an independent, not-for-profit organization that sets accounting and reporting standards for public and private sector companies in the United States, uses GAAP guidelines as the basis for its system of accepted accounting policies and practices, reporting, and other documents. Internal users are the people who perform, manage, and operate day-to-day activities from within an organization. Financial reports or information are the result of the accounting process that has been transferred to users in two forms – internal and external. External financial reporting is a business practice in which financial information is regularly provided to investors and potential shareholders. Reports are primarily financial statements and other related information about the company that investors need to make an investment decision. As a general rule, reports do not contain confidential information about the company unless they are disclosed for a specific purpose. External users also use an organization`s historical financial performance model as a predictive tool. For example, when deciding to lend money to an organization, a bank may require a number of financial statements and other financial information from the organization. The bank will assess historical performance in order to make an informed decision about the organization`s ability to repay the loan and interest (the cost of borrowing). Similarly, a potential investor can look at a company`s past financial performance to assess whether or not to invest money in the business. In this scenario, the investor wants to know if the organization is providing a sufficient and consistent return on investment.
In these scenarios, financial information adds value to the process of allocating scarce resources (money). When lenders and potential investors determine that the organization is a worthwhile investment, money is provided, and if all goes well, these funds are used by the organization to generate additional value greater than other uses of the money. External users have a direct or indirect interest in accounting information. Financial reports prepared for internal use are different from financial reports that are made available to the public. In general, internal financial reporting tends to be more detailed in order to provide management with sufficient information to support the decision-making process. Internal users use financial statements to make decisions that may affect business operations. Internal users include company management, the board of directors, or company employees. This could also include private equity firms, venture capital firms or the parent company if the company is a subsidiary. A company can also use an internal financial report to track current customers and monitor how credit customers repay loans. It works in companies that offer credit terms for sales transactions.
Management uses the report to see how well credit customers are complying with their credit terms. Internal financial reports can be used to provide information about employees. Management may request internal reports from employees that include information on employee performance, departmental operational effectiveness, whistleblowing activities, etc. Management can use the reports to make decisions about promotions, deployment, and layoffs. Operational accounting identifies, measures, analyzes, and communicates the financial information management needs to plan, control, and evaluate a company`s operations for internal users. Let`s look at who the internal and external users of account information are and why they use it. Listed companies receive capital from the public and therefore have a duty to inform the public about the financial health and functioning of the company. The public is interested in knowing the result achieved during the year, the value of assets and liabilities, dividends paid, etc. Financial analysts also use the information to calculate metrics and assess the company`s financial strength compared to other competing companies. External users of the financial statements will use the information disclosed in the financial statements to determine whether a business relationship with the entity would be beneficial. Internal users would use financial statements to make decisions that affect business operations.
External users of financial statements include: 1) Regulators: Regulation. Key differences between different types of financial information Financial accounting is one of the broad categories of accounting study. While some sectors and types of organizations differ in how financial information is prepared and reported, accountants generally use the same methods – called accounting standards – to prepare financial information. In the introduction to financial statements, you will learn that financial information is primarily communicated through financial statements that include the income statement, equity statement, balance sheet and cash flow statement, and disclosures. These financial statements ensure that information is consistent from period to period and generally comparable from one organization to another. The conventions also ensure that the information provided is both reliable and relevant to the user. Virtually all activities and events that occur in a business have a cost or value and are called a transaction. Part of an accountant`s responsibility is to quantify these activities and events.
In this course, you will learn about the many types of transactions that occur within a company.