Identify the main users of financial reports, explaining to what use(s) they may put such reports. To what extent is there a conflict between different uses? How far are these conflicts resolved in a single set of annual accounts?
The financial reports are profit and loss account, balance sheet and cash flow statement.
There are many users /parties interested in the accounts of a company /organization. These include the following:
The owners / shareholders
The directors / managers
The creditors, i.e. suppliers of goods on credit
The tax authorities
Lenders, such as banks or other financial institutions
The users want the accounts for a variety of purposes, for example:
The owners/shareholders are mainly concerned of the profitability of the business and they therefore use them to see if they are getting a satisfactory return on their investment, and also to assess the financial health of their company/business. They may also use financial statements to assess the performance of the managers and decide the pay of managers who are employed to run the business for owners, which is part of the stewardship role of the accounting.
The directors/managers are the ones to conduct the day-to-day operations and decision-making of the business and they are, arguably, the most important users of the business because they require much more information in great detail on a more frequent basis than any other users. They normally use them for making both internal and external comparisons to evaluate the performance of business. They may compare their own financial analysis of their company with industry figures (competitors) in order to ascertain their company’s strengths and weaknesses. Management are also concerned with ensuring that the money invested in the company / organization is generating an adequate return and that the company / organization is able to pay its debts and remain solvent.
The creditors want to know if they are likely to get paid, and look particularly at liquidity, which is the ability of the company / organization to pay its debts as they become due. They are also concerned with the viability of business.
The tax authorities use them for value added tax, and income and corporation tax purposes. They are probably the one who concerned most with the genuineness of the financial statements as an underreported profit would reduce the amount of taxes being collected and the public would consequently be suffered as the money of government will have fewer funds to spend to improving the public transportation, pensions, reforms, etc.
Prospective lenders use them to assess whether or not to invest their money in the company / organization.
Government may wish to check whether the profit of the utility company are too excessive and thereby increasing the owner’s wealth too much while reducing the spending power the consumers in a whole. And the contractors of government’s profit shall be checked upon to see if they exaggeratedly quoted their prices during tendering and monitoring the progress of the contract being conducted.
As having being identified above, different users have different concerns of the financial aspect of the business and it would be listed as follows:
The owners / shareholders: profitability & viability
The directors / managers: profitability & viability
The employees: viability
The creditors, i.e. suppliers of goods on credit: viability:
The tax authorities: profitability (net profit to be taxed)
Lenders, such as banks or other financial institutions: profitability & viability
Government: profitability & viability
Owners / shareholders needs the generation of the profit on their investment and they expect a good return of their money they put in the business. And they also concerned with the viability because they want their business or business they invested to grow, to earn more money, instead of losing money, or going to liquidation (they may consequently loss all their money invested in the business!).
The directors / managers because their pay may be linked to the performance of the business and the more profit they earned for the business, the higher their salary is likely to be. The viability is also important to them as they want to keep their current job as they are also employed by the business.
Employees, if not shareholders of the business, are employed by the management to work for the business for various purposes. Their salary will be treated as an expense against gross profit so management may try to minimize this expense by employing an efficient worker who are reasonably paid and reducing the number of employees while at the same time add more responsibilities to the remaining employees. Therefore, as long as the business remains, they could keep their job and secure their pay as a financial security, which is of great important to common employees. They would be happy to see the business grows via looking through the financial statements so that they would know that the can continuously work for the business.
Creditors are concerned with the viability of business because they would like to know if they are likely to be paid by the business before too long. As long as the business has sufficient liquidity to pay them, they do not care and are not very interested in how much profit the business generated.
Tax authorities always keep a keen eye on the profitability of the business because they want to the profit of the business to be taxed. They want to detect any underreported profit by examining the financial statements and attempt to discover any dubious items to be enquired and demanded details.
Lenders, who provide long-term loan to the business, secured or unsecured, concern about the profitability and viability of the business as they want to know if they can be repaid in the schedule designated.
Government may want business to sustain and therefore create more employment opportunities for the society. They would like to know the profitability of the business so as to impose regulations to keep the profit of business in a reasonable range to make it more afford and therefore increase the spending power of people and reduce the inflation.
Although different users have different interests in business, the conflict can mainly be solved by the general-purpose and standardized format of financial statements. Because it is very costly and impractical to produce a different financial reports to each and every specific users, it is widely accepted that a general-purpose financial statements be produced to satisfy the most needs of the all users. Standardized format would provide a easier way to make comparison of the business with its competitors as well as with the past reports of the business itself.