The Potential Users Of Financial Accounting Information Accounting Essay
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Published: Mon, 5 Dec 2016
The users are an important component in accounting systems, and play a key role in usefulness of financial accounting information. Financial accounting is a term usually applied to external reporting by providing information about the financial position of a business to a wide range of users in making economic decisions (Weetman, 2011). The purpose of this paper is to review the relationships between the potential users and actual users of financial accounting information and the relevancy evidence to current practice. A variety of different arguments have been put forward about this issue.
The paper has been divided into five parts. It first gives a brief overview of who the potential users of financial accounting information are. Secondly, it deals with the actual users of the information. It then goes on to how useful of financial accounting information is and looks at how strong is the evidence that they use information in the ways predicted. Finally, the reason why the potential users may not be actual users of financial accounting information is carried out.
The potential users of financial accounting information
Financial accounting aims to allow users to understand the economic activity of the company (Stolowy, et al., 2010). For a limited liability company financial statements would contain balance sheet, profit and loss account, statement of recognized gains and losses and cash flow statement (Weetman, 2011). Without users, financial accounting information will lost its role. According to FASB (2010), the objective of financial reporting is to provide useful financial information for existing and potential users to make economic decisions. There are several users who are interested in financial accounting information. Atrill and Mclaney (2008) stated that the purpose of financial information to be used and the person financial information to be given must be clear. By definition and different needs from each other, it could define as internal users such as managers and external users which include owners, lenders, government, employees, competitors, customers, community, and suppliers (IASC, 1989). General purpose financial statements expected accounting information which would be of interest to a wide range of user groups (FASB, 2010), see appendix 1. Therefore, everyone could be the potential users of financial accounting information as long as there is a need for the information.
Actual users of the financial accounting information
From the internal management view, it has been argued that the main users of accounting information about an organization could be those who manage the company every day, such as managers (Weetman, 2011). A Statement of Basic Accounting Theory (ASOBAT) did not declare any particular user group such as investors to be primary users. Instead, it has been asserted that useful information was required for both internal and external purpose. Classified users of accounting information into two broad groups: external users which include present and potential investors, creditors, employees, stock exchanges, governmental units and customers on contrast with internal management. However, According to FASB (2010), the primary users of financial accounting information refer to existing and potential investors, lenders, and other creditors. They need entities reporting information provided indirectly. As actual users are contained in the potential users, see appendix 2, if they have same interests in the financial accounting information, the actual users might include managers, lenders, suppliers, customers, competitors, employees, government and community (Britton and Waterston, 2006). Similar conclusion has been argued by Atrill and McLaney (2008), Perks (2007) and Weetman (2011).
The usefulness of financial accounting information
Most of users treat the financial statements as the main source of financial information. According to IASB (1989), it assumes that if financial statements meet the needs of investors, it will also meet the needs of most other users (Weetman, 2011). The usefulness of accounting information is under premise of its high qualitative characteristics. There are four main qualitative characteristics which are described as relevance, reliability, comparability and understandability. However, only if the information actually makes a change in users’ decisions could define it as relevance Framework (1989). Also accounting information should be material and the benefits of providing the information should outweigh the costs (Atrill and Mclaney, 2008).
The purpose of financial statements is not meant to meet all the users’ needs (FASB, 2010). It is possible to prepare the financial statements for general purpose which will have some interests for all users. For instance, as investors provide risk capital to the company, the provision of financial statements meets both investors and other users who are interested in estimating risks (Stolowy, et al., 2010). These financial reports are valuable for users who have no bargaining power and no significant economic influence in organizations (Elliott and Elliott, 2009). It has been asserted that general purpose financial statements tend to focus on the primary users which included the owners, long-term lenders and creditors. The interests of primary users might overlap with the interests of other user groups. Therefore, this could satisfy most users’ needs for financial accounting information (Weetman, 2011). The financial statements, which treat owners, lenders and creditors as primary users, could provide useful financial accounting information for the existence of users.
use information in the ways predicted
The financial accounting information could help users to make decisions and reduce uncertainty over the financial position and performance of the business. For example, to help availability of funds to pay owners a return, to repay loans, to reward employees (Atrill and Mclaney, 2008). It has been claimed that accounting information cannot meets all of the needs of each of the various user groups (FASB, 2010). Atrill and Mclaney (2008) stated that Different groups of users have different value and needs. However, user groups desire to know more accounting information as possible. Conflict between user groups is likely happen during business processing. For instance, managers they have close involvement with the business, they have access to a wide range of information and most might be confidential in company (Weetman, 2011). They know more internal information about the current and future situation of the company than outside investors. This could be defined as information asymmetry (Scott, 2009). Investor might make wrong decision based on inaccurate information provided by managers, so they want to know more information besides the financial statements.
It is further contended that there are several user groups they want to meet specific needs directly from the business, such as governments, HM Revenue and Customs, and managers and directors. Lenders are usually given much more information than is included in published financial statements, including forecast information, monthly breakdowns and cash budgets (Perks, 2007). To have everything to be included in a company’s financial statements is unrealistic (Perks, 2007). Financial accounting information is presented as the form of highly summarized financial statements.
The main problem with the financial information needs of the user groups are that most want to know predict the future. Shareholders, creditors, lenders and employees all want to know what the company’s future prospects are. But most of information in financial statements has already happened (Stice and Stice, 2006). Many users concerned how valuable the past information was and the reliability of business future forecast. Therefore, it is not possible for a company to publish exactly the information that everyone wants. The information is designed on the behalf of focus on shareholders and creditors (Perks, 2007)
There is no similar substitute for the information provided by the financial statements. Thus, if users cannot gather the required information form the financial statements. It is often unavailable to them. Other sources of information concerning the financial health of a business are normally much less useful. As a result, the evidence is not strong enough for the user groups to use information in the way predicated and it is normally very difficult to assess the impact of accounting on decision-making (Atrill and Mclaney, 2008)
potential users may not be actual users of financial information
As Young (2006) claimed some of the actual users were multiple, conflicting, inconsistent, and uneducated. These users are unreliable and limited knowledge about financial accounting information and its process. FASB (2010) have conducted a new concept of the financial statement user-a rational economic decision-maker. It means that the decisions of interest are rational, if statements can be connected to the forecast of future cash flows, it could be said rational decision makers need it. Users can be seen more as hypothetical readers of financial statements than as actual users, because they need particular types of information (Young, 2006). Moreover, the conflicting needs of users and limited information provided in reports might cause potential users cannot find information useful to them (Atrill and McLaney, 2008). Therefore, the potential users might not be the actual users of financial accounting information, a portion of potential users could be.
In conclusion, the current paper has reviewed the users of financial accounting information. The question posed at the outset of this paper was to examine the reasons why the potential users may not be actual users of financial accounting information and relevancy evidence to practice. It has been seen that different users have different needs, even financial statements focus on primary users to provide useful information. However, it could not achieve the expected level and cannot meet all users’ needs. It may therefore be concluded from the above discussion that the actual users are a portion of potential users. Potential users might not be actual users of financial accounting information.
The relationship between potential users and actual users:
Appendix 2 Users and their information needs (FASB,2010)
Investors. The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends.
Employees. Employees and their representative groups are interested in information about the stability and profitability of their employers.
They are also interested in information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities.
Lenders. Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.
Suppliers and other trade creditors. Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trade creditors are likely to be interested in an entity over a shorter period than lenders unless they are dependent upon the continuation of the entity as a major customer.
Customers. Customers have an interest in information about the continuance of an entity, especially when they have a long-term involvement with, or are dependent on, the entity.
Governments and their agencies. Governments and their agencies are interested in the allocation of resources and, therefore, the activities of entities. They also require information in order to regulate the activities of entities, determine taxation policies and as the basis for national income and similar statistics.
Public. Entities affect members of the public in a variety of ways.
For example, entities may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the entity and the range of its activities.
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