Identify FOUR users of financial statements and explain their information needs. (6 marks)
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The people who might be interested in financial information about the company may be classified as follows.
- Shareholders in the company. They will be interested in the company’s profitability and its ability to pay dividends. They will also be interested in the company’s long term prospects.
- Managers of the company. These are people appointed by the company’s owners to supervise the day-to-day activities of the company. They need information about the company’s financial situation as it is currently and as it is expected to be in the future. This is to enable them to manage the business efficiently and to take effective control and planning decisions.
- Trade contacts, including suppliers who provide goods to the company on credit and customers who purchase the goods or services provided by the company. Suppliers will want to know about the company’s ability to pay its debts; customers need to know that the company is a secure source of supply and is in no danger of having to close down.
- Providers of finance to the company. These might include a bank which permits the company to operate an overdraft, or provides longer-term finance by granting a loan. The bank will want to ensure that the company is able to keep up with interest payments, and eventually to repay the amounts advanced.
- The tax authorities, who will want to know about business profits in order to assess the tax payable by the company on its profits and any sales taxes.
- Employees of the company. These should have a right to information about the company’s financial situation, because their future careers and the size of their wages and salaries depend on it. (Any 4)