LO4 Interpret financial information
Understanding financial information and discussing implication with appropriate
person
When looking at a business, the owner/manager needs to know whether the firm is earning a
profit. It does not matter how small the business is, accounting should be seen as being part of the
overall management strategy, with financial information relating to all facets of the business being
readily available.
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
Classification of Users of Financial Statements
The various users of financial statements are classified and detailed as follows:
1. Internal Users
The internal users of financial statements are individuals who have direct bearing with the
organization. They may include
A. 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.
B. 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.
2. External Users
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.
Financial information helps owners/managers to know
whether:
The firm’s profit is improving or declining
The owner is earning a sufficient return on the investment in the business
How much money (if any) the owner can withdraw from the business
The business has enough liquidity to continue trading
The firm can meet repayments of any outstanding loans.
The firm is financially stable
The firm’s credit customers are paying on time
