Accounting and Financial Statements
Upper Iowa University
Accounting and Financial Statements
In this essay I am going to explain and identify external users of accounting information and give detail on the main characteristics and how these characteristics and the conceptual framework develop the benefits of financial statements for external users.
Financial accounting includes information distributed to external users that are not part of the enterprise, e.g. stockholders, creditors, customers and suppliers, although the information is also of interest to the company's officers and managers.
External users have an interest in the businesses final accounts. They ...view middle of the document...
They want to know how quick they are going to be paid. (Elliot, B and Elliot) Trade creditors are interested in data that allows making a decision about whether they should sell to the business and whether the amount owed to them will be paid when it is due. (Weetman P)
Government is interested in the distribution of resources and therefore, in the activities of entities. They require information in order to control this and provide a basis for national income and economic statistics to assess taxation. The Government look at the businesses profit because they are interested in making sure that the businesses accounts are not bias, therefore, ensuring that the correct amount of tax is collected from them. The government tries to make the financial records produced by the use of various accounting systems, so that the ability to compare numbers between companies and industries isn’t lost. (Weetman P)
Customers are interested in the duration of the entity, especially when they have a long term involvement with a business. They want to know how reliable the business is. They need information about the current and future supply of goods and services offered, price and other product details, including the conditions of their products and returns policies. This information can be found from sales staff of the business or from trade. Customers are able to choose from all the businesses in the market and are looking for reasons as to why they should go for a certain business. (Weetman, P)
Lenders are the banks and the other financial institutions who lend money to businesses. Lenders require information that helps them determine whether loans and interests will be paid when on time.
Before a user can be regarded as an external user group, accounting information should satisfy some qualitative characteristics to verify the usefulness of the information. The main four consist of: understandability, relevance, consistency, comparability.
Understandability would be clarifying accounting information in a way that it will be understandable and clear to users who are usually assumed to have some partial knowledge about business and its economic activities.
Relevance is the usefulness of the information to the user. How up to date is the information? This means that for the accounting information to be useful it must help a user to form, confirm an accounting decision. For example, ask them, should I invest? Should I lend money? Should I work for this business?
Reliability means that the accounting information trustworthy, accurate, and reliable to make decisions based on it. It has to be free from bias and has to be audited.
Consistency indicates consistent treatment of similar items and application of accounting policies. The methods used by a company for accounting should stay the same for every accounting period in order for the user of the financial statements to be able to depend on them.
Comparability is to compare...