FUNDAMENTALS OF ACCOUNTANCY, BUSINESS

AND MANAGEMENT 1
TOPIC 3:
USERS OF ACCOUNTING INFORMATION

Objectives:
 Define external users and internal users of Accounting Information
 Identify and describe the type of information needed of each group
USERS OF ACCOUNTING INFORMATION
To be successful, businesses must interact with countless customers, investors, creditors, and other
groups. These outside parties are the main sources of income and/or funds that are key factors in
determining if a business will be profitable or not. So, to maintain lasting relationships with these groups,
companies have to communicate accounting information to its users of accounting information. In this
way, they can be empowered to make better economic decisions. Financial reports supply the information
these groups demand in order to make decision connected to business.
2 types of Financial Statements:
1) General Purpose Financial Statements-prepared to accommodate the information needs of persons
who have no capability to request directly to the company. They are designed to address inquiries of a
wide range of interested users. (e.g., customers, creditors, investors, government, academe, public)
2) Specific Purpose Financial Statements are prepared based on requests of parties that have the
capability to ask for accounting information. (e.g., Board of directors, managers, employees,
stockholders)
USERS OF ACCOUNTING INFORMATION
EXTERNAL USERS

External Users of Accounting Information are those individuals or organizations outside of the company
who are interested in its financial information. These users are not directly involved in managing and
operating the business.
EXTERNAL USERS

1) CUSTOMERS- are the main source of income in businesses. Businesses are established solely for the service
of their customers. All of us have been a customer at some point in our lives. And businesses also are
customers of themselves. Thus, to define customers, these are people or entities that acquire goods and
services for a fee.

Customers are interested of Accounting information so that customers can determine if it will be profitable for
them to transact with that business. This is especially essential if the customer plans to build long-term
relationship with the business. Like for example, food chain business. Business entities need to assess the
financial position of its suppliers which is necessary for them to maintain a stable source of supply in the
long term. If suppliers having difficulties or has a track record of being unreliable, customer won’t
transact them anymore. If the FS of the Suppliers shows continuously losses, it might indicate that
products and services provided are not high quality. And also customer checks the financial capabilities to
honor obligations on time.

Customers are also interested in profitability of the company and the future commitments or projects.
EXTERNAL USERS

2) CREDITORS- are individuals or entities who lend their resources (usually money) to the business in
exchange for a fee. The fee charged by creditors is the payment for the use of their resources. This is in the form
interest.
Before creditors grant loans to a business, they first examine its Financial Statements. The biggest fear of
creditors is that they will not get paid the amount due to them. So, they need to background check the business
and scrutinize its FS before engaging any business transactions with them. They will determine the credit
worthiness of an organization. Terms of credit are set by creditors according to the assessment of their customers'
financial health.
Three main factors considered by creditors before lending to a company:
a) Riskiness of lending
b) Profitability of the company
c) Company’s amount of borrowings.

Examples of Creditors: Banks, Lending institutions, wealthy individuals, government, suppliers, and other
businesses
EXTERNAL USERS

3) POTENTIAL INVESTORS- are individuals or entities who put their resources (usually money) in a business
hoping to earn a decent amount of return. Investors may win or lose in their investment. Investing in a business is
a gamble.
To compensate investors for the risk they take, they normally could earn more profits than creditors. If the
company is doing well, expect a large amount of profit. But if the company incurs loss, investors might lose
everything they invested. Investors are even more afraid than creditors because of the possibility of losing their
money.
Financial Statements provide potential investors the necessary information to decide if they will invest in the
business. They will use it for analyzing the feasibility of investing in a company. Investors want to make sure
they can earn a reasonable return on their investment before they commit any financial resources to a company.
They will also try to estimate the risk associated with investing of a certain company.
The level of profits presented in the FS is primary concern for investors. This information is a key indicator if an
investment will be profitable.
Investors also evaluate the company’s financial ratios to get a feel of how the company operates.
Investors look out for the earnings retention policy of a company as well.
 EXTERNAL USERS
4) GOVERNMENT- are also users of financial information with the purpose of regulating businesses in the economy.
Our economy consists of thousands of businesses interacting with one another. Government’s main role is to scrutinize
businesses, especially the large ones.
Different government agencies are assigned to check if businesses follow guidelines provided by law in their
operations.
Government agencies also see if the businesses are not trying to deceive the other users of financial statements by
misrepresenting the amount of earnings or manipulating portions of the FS. Regulating businesses is a crucial role of
the government to prevent financial collapse like in US.

Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a company. They use FS to
compute the amount of taxes payable to the government.

Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure of accounting information is in
accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such
information in forming their decisions.

Social Security System (SSS), and Local Government Units (LGUs).

 EXTERNAL USERS
5) ACADEME- are also users of financial information (e.g., professors, researchers, students) to utilize financial
information for academic purposes. Use of financial statements for academic purposes is not confined in the
accountancy field. Other fields like banking and finance, entrepreneurship and economics similarly make use of
financial statements.
Financial statements tell a story about the operations of the company. Professors and students can take advantage of
this information. Example, they might want to study the financial statements of a footwear company. By doing so,
professors and students might get an idea on how the industry operates.
Financial Statements also serve as blueprint to help students in understanding the field of accountancy.

Researchers study the financial statement to identify particular trends in a specific industry or the economy as a whole.
The result of the studies can greatly help the government in assessing the condition of the economy.
Researchers may also aim to improve the accountancy practice in the country by searching for loopholes and possible
improvements in the accounting standards currently being used.
 EXTERNAL USERS
6) PUBLIC- the general public is the last group to be an external users of Accounting Information.
Companies affect the whole economy. By continuing to operate, companies create jobs for the public. The results of
company operations also pull the economy toward growth or recession.
Financial Statements give us hint about the condition of the economy. If the economy is not doing well, the general
public cut on their spending and increase their savings.

Since Financial Statements taken into together can represent the economy, other decision of the public that can be
affected involve:
a) Whether or not it is wise to start a business given the current economic conditions:
b) To stay on you current job or look for higher-paying job
c) Determining the best use of person’s resources
d) Determining the optimal level of savings and consumptions.
INTERNAL USERS

Internal users of accounting information are those individuals inside a company who plan, organize, and run
the business. These users are directly involved in managing and operating the business. These include marketing
managers, production supervisors, finance directors, company officers and owners
 INTERNAL USERS
1) MANAGEMENT- are composed of employees within the company that can implement decisions affecting the
company’s operations. Managers have authority to make judgments for the company. They are often refer as brain
of the company. Thus, information to company operations is often given to them. All managers must know the
company inside and out.

By examining the Financial Statements, managers are able to identify problems and respond to them accordingly.
Some of the problems faces are:
a) What areas of the business are becoming problematic?
b) What segments of the business underperformed during the last period?
c) Is the level of company expenses becoming alarming?
d) How does the company handle its debt?
e) Does the company use its resources in the best possible way?

Information need: income/earnings for the period, sales, available cash, production cost
Decisions supported: analyze the organization's performance and position and take appropriate measures to improve
the company results. sufficiency of cash to pay dividends to stockholders; pricing decisions
 INTERNAL USERS
2) EMPLOYEES- are users for Financial information primarily for personal reasons.

Employees are concerned with the company’s profitability. Working in a profitable company, feels they timely and
adequately compensated and have received many employees benefits. Additional benefits like year-end bonus,
remuneration packages and health benefits.

The current condition of a company also impacts employee morale and performance. Companies that are performing
well almost always have employees that are motivated.

Information need: profit for the period, salaries paid to employees

Decisions supported: job security, consider staying in the employ of the company or look for other employment
opportunities
 INTERNAL USERS
3) BUSINESS OWNERS- or stockholders are the existing investors of the company. They already invested their
personal resources in the company. They have already taken the gamble. All owners are interested in the results of the
company operations.

Owners would like to know if their investments will yield acceptable returns. A profitable business keeps its investors
happy. As a result, they would not liquidate their ownership. They might even provide additional resources while the
business is enjoying its success.

Information need: profit or income for the period, resources or assets of the business, liabilities of the business

Decisions supported : considerations regarding additional investment, expanding the business, borrowing funds to
support any expansion plans.
ACTIVITY 3 FEB 3, 2023 (1 WHOLE SHEET OF PAPER)

1)Give at least 3 internal users of accounting information.

2) Give at least 3 external users of accounting information.
3)Differentiate internal users from external users of accounting
information.
4) Do external users need the accounting information more than the
internal users? Explain why or why not.

TO BE SUBMITTED ON MONDAY FEB. 6, 2023

PLEASE BE READY FOR OUR FIRST SUMMATIVE TEST FOR LESSONS 1-3