The following points highlight the three important users of accounting information. The users are: 1. Management 2. Users with Direct Financial Interest 3. Users with Indirect Financial Interest.
User # 1. Management:
Management is a group of people who are responsible for using the resources and managing the affairs of an entity to achieve the goals and objectives. Managers perform many managerial functions such as planning, controlling, directing, measuring, evaluating and taking corrective actions.
Business managers need to decide continuously what to do, how to do it and whether the actual results tally the original plans and targets. Accounting provides timely and useful information to management for planning, control, performance measurement, decision-making and for performing many activities and functions in the company.
Due to this, management is.one of the most important users of accounting information and a major function of accounting is to provide useful information to management.
User # 2. Users with Direct Financial Interest:
The users who have direct financial interest in a company are existing and potential investors and creditors. These users do not participate in the actual management of the company but have interest in how a business has performed because they have invested or are thinking of investing in a company.
Existing and potential investors are obviously interested in the past performance of a company and its earning potential and growth prospects in the future. For this, the company’s financial statements and other information should be analysed to decide and select a profitable investment opportunity.
Similarly, the existing and potential creditors require accounting information to-make sound credit decisions, i.e., whether to lend money to a company. The creditors are interested in knowing whether the company will have enough cash to pay interest charges and repay the debt at the due date. For this, the company’s liquidity and cash flow position should be analysed.
Banks, finance Companies, mortgage companies, investment companies, insurance companies, individual creditors and similar other individuals and groups who lend money need accounting information to analyse a company’s profitability, liquidity and financial position before making a loan to the company.
Besides the investors and creditors, there are other users such as employees, and suppliers who have direct financial interest in a company and accounting information as well.
Employee’s decisions may be based on perceptions of a company’s economic status acquired through financial statements. In particular, prospective and present employees may use the financial reports to assess risk and growth potential of a company, therefore job security and future promotional possibilities.
To suppliers, a business enterprise is a source of cash in the form of payment for goods or services supplied. Suppliers are also interested in a company’s ability to generate adequate cash flows for the payment of their goods and services, which in turn, can be decided on the basis of the company’s financial statement.
User # 3. Users with an Indirect Financial Interest:
There are some other users who have indirect interest in the business of a company or who use accounting information to help others having direct interest in a company’s profitability and financial position.
Such users are customers; taxation authorities; governmental and regulatory agencies; labour union; financial analysts and advisers; Stock Exchanges and brokers; underwriters; economists; planners; consumers’ groups; general public and the financial Press.
Customers may use financial statement data to forecast the likelihood and/or timing of a firm going bankrupt or being unable to meet its commitments. This information may be important in estimating the value of a warranty or in predicting the availability of supporting services or continuing supply of goods over an extended period of time.
Taxation authorities require financial statements to ascertain tax liability of a company. Governmental and regulatory agencies are concerned with the financial activities of business organisations for purposes of regulation to protect the public interest.
Labour Unions are also vitally interested in the stability and profitability of the organisation that hires them or in which the employees are working. Stock-brokers, financial analysts, investment advisors have an indirect interest in the financial performance and prospects of a company as they advise investors and creditors in their investment and lending decisions.
Economic planners use accounting information to set economic policies, to forecast economic activities and to evaluate economic programmes undertaken in the country.
The other users such as consumers’ groups, economists, financial press and the general public have become more concerned about business enterprises as well as with the effects that these enterprises have on the environment, social problems, inflation, and the quality of life.