If you want to know how a business is performing, financial statements provide the answer. Is there enough cash in the bank to pay the bills? Is the company making money? Have the assets been swallowed up by debt? The users of financial statements such as the balance sheet include people both inside and outside your company.
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- Meet the Statements
- Internal Users of Financial Statements
- External User Statements
- External users' statements have to follow GAAP or similar accounting frameworks. That doesn't mean they all want the same information. Investors may be most interested in your financial performance, while lenders might focus on your current debt load.
- Which of the following is considered an external user of accounting information?
- Which of the following is not a user of accounting information?
Meet the Statements
Because so many people rely on financial statements for information, federal regulation, and generally accepted accounting principles (GAAP) have standardized the formats. One big difference between internal and external users' statements is that financial statements for external use must fit these standard formats. If internal users such as your company's management or owners want information, you can use any format that works for them, or you.
The essential financial statements are:
- The income statement, which shows how much revenue you took in, and how much money you spent. It includes money earned but not paid to you, and money you owe but haven't paid. This statement provides a sense of how profitable the business is.
- The cash flow statement, which looks at how much money changes hands. This knowledge is important because you can have a profitable company that can't pay its bills if customers don't pay quickly enough. If you operate on a cash basis, cash flow equals income.
- The balance sheet is like an equation with one side of the equal sign comprised of your total assets, and the other, your total debts and the owners' equity. This statement shows how much the company is worth over and above the debt load.
- The supplemental notes cover various technical points and details that give perspective on the big three.
Internal Users of Financial Statements
Internal users of financial statements fall into three main groups: management, owners and, sometimes, employees. In many small businesses, the owners are the managers. The key users of financial information in a partnership, for instance, are usually the partners themselves.
- Managers are the primary users of financial statements because they need the information to do their jobs. They have to make decisions such as whether to add debt or how to maintain cash flow. Making those calls requires detailed knowledge about company finances.
- Owners can use the statements to evaluate whether their investment is safe and whether the company is providing an acceptable return on their money.
- Some employees, such as accountants or the finance department, are users of financial statements because it's part of their job. If other employees have access to the information, it can help them judge whether the firm is in good shape or if it's time to jump ship.
Because those in management have to make decisions for the business, they need different information than other internal users of financial statements. For example, they may want income statements for each product line or store rather than for the business as a whole.
External User Statements
If someone wants to know about your finances but isn't part of your business, they're external users of financial statements. They fall into many more categories than internal users of financial statements:
- Lenders. If you want money from the bank, they're going to want to see your financial data first.
- Regulators. If you're a publicly traded corporation, you'll have to send the Securities and Exchange Commission copies of your statements.
- Outside investors. Like lenders, stockholders and venture capitalists will want to review your statements before they write you a check.
- Creditors. If you owe money or you're slow paying your bills, your creditors may want to double-check your statements. Suppliers may review your financial health before deciding to extend credit.
- Unions. If your cash flow and income are steady, the union may decide you can offer a more generous employment package.
- Publicly traded companies' financial statements are public information. Anyone who takes an interest in your business may become an external user. That could include customers, competitors and the media.
External users' statements have to follow GAAP or similar accounting frameworks. That doesn't mean they all want the same information. Investors may be most interested in your financial performance, while lenders might focus on your current debt load.
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Which of the following is considered an external user of accounting information?
Shareholders since not related to the management of business operations are considered as external users.
Which of the following is not a user of accounting information?
Creditors are not the internal users.