Financial statements are intended to be understandable by readers who have “a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently.”
There are different kinds of users of financial statements. The users of financial statements may be inside or outside the business.
The users of financial statements use financial statements for a large variety of business purposes and their ability to understand and analyze financial statements helps them to succeed in the business world.
Classification of Users of Financial Statements:
The financial statements are used by different categories of people for different purposes. The various users of financial statements are classified and detailed as follows:
The internal users of financial statements are individuals who have direct bearing with the organization. They may include:
Managers and Owners: For the smooth operation of the organization, the managers and owners need the financial reports essential to make business decisions. So as to provide a more comprehensive view of the financial position of an organization, financial analysis is performed with the information supplied in the financial statements. The financial statement is used to formulate contractual terms between the company and other organizations.
A variable of the financial statement like the current debt to equity ratio is important in deciding the amount of long term capital that would be required to be raised. The financial statements of other companies can also provide investment solutions to different companies. Sometimes it becomes difficult to decide the right field in which financial resources may be channelised. In such situations the financial statements of other companies provide the appropriate guideline.
Employees: The financial reports or the financial statements are of immense use to the employees of the company for making collective bargaining agreements. Such statements are used for discussing matters of promotion, rankings and salary hike.
The External users comprise of:
Institutional Investors: The external users of financial statements are basically the investors who use the financial statements to assess the financial strength of a company. This would help them to make logical investment decisions.
Financial Institutions: The users of financial statements are also the different financial institutions like banks and other lending institutions who decide whether to help the company with working capital or to issue debt security to it.
Government: The financial statements of different companies are also used by the government to analyze whether the tax paid by them is accurate and is in line with their financial strength.
Vendors: The vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.
General Mass and Media: The common people as well as media also make part of the users of financial statements.
Brief List of Users of Financial Statements:
- Existing equity investors and lenders, to monitor their investments and to evaluate the performance of management.
- Prospective equity investors and lenders, to decide whether or not to invest.
Investment analysts, money managers, and stockbrokers, to make buy/sell/hold recommendations to their clients.
- Rating agencies (such as Moody’s, Standard & Poor’s, and Dun & Bradstreet), to assign credit ratings.
Major customers and suppliers, to evaluate the financial strength and staying power of the company as a dependable resource for their business.
- Labor unions, to gauge how much of a pay increase a company is able to afford in upcoming labor negotiations.
Boards of directors, to review the performance of management.
- Management, to assess its own performance.
- Corporate raiders, to seek hidden value in companies with under priced stock.
- Competitors, to benchmark their own financial results.
- Potential competitors, to assess how profitable it may be to enter an industry.
- Government agencies responsible for taxing, regulating, or investigating the company.
- Politicians, lobbyists, issue groups, consumer advocates, environmentalists, think tanks, foundations, media reporters, and others who are supporting or opposing any particular public issue the company’s actions affect. Actual or potential joint venture partners, franchisors or franchisees, and other business interests who need to know about the company and its financial situation.
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