The Necessity of Financial Accounting

The users of financial reporting

There are seven types of users and their information needs:

1. Present and potential investors

They require information to assist in reaching share trading decisions. The financial reporting of entity assists them to evaluate the performance of the entity and its management, and assess the effectiveness of the entity in achieving its objectives.

Moreover, it also helps investors to estimate the future prospects of the entity, including its ability to pay dividends and hence predict future levels of investment.

2. Lenders

Company accounting information reveals its present and likely future cash position, the economic stability and vulnerability, since this will determine whether the company will be able to pay the annual interest on loans and repay the money borrowed as and when they become due.

3. Suppliers and other trade creditors

They are interested in information relating to the reporting entity’s ability to pay its debts. Furthermore, this assists suppliers to decide whether to increase its production capacity in order to meet the reporting entity’s future demands.

4. Employees

They interested in information on their employer’s stability and profitability of the entity in which they work. They are also interested in information that enables them to assess their employer’s ability to provide remuneration, employment opportunities, and retirement and other benefits.

5. Customers

The reports may be useful to customers in assessing the likelihood of the reporting entity’s continued existence.[1] In case of the reporting entity is engaged in construction work, customers will wish to assess the likelihood of its being able to complete long-term contracts, and vice versa.

6. Governments and their agencies

Government are interested in the allocation of resources and activities of entities. Moreover, they also interested in information that assists them in regulating the activities of entities, assessing taxation and...