Users and uses of financial statements

External users

1. Investors, Creditors = is the company earning satisfactory income? How does the company compare in size and profitability to others? Will the company be able to pay its debts as they come due?

2. Government authorities = SEC, CMA, HMRC, FRC

Internal users

1. Marketing = how can we improve sales figures?

2. Board members = how much should we pay the CEO?

3. HR = Can we afford to give pay raises this year?

Type of accounting

1. Financial

2. Managerial

Financial accounting

External 

• Meets the needs of owners and lenders, as well as external decision makers

  • Should I invest?

  • Is the business profitable?

  • Should we lend them money?

  • Can this business pay us back?

• Tends to be general-purpose, aimed primarily at providers of finance

• Subject to regulations and accounting standards

• Produced on an annual basis for most businesses

Managerial accounting

Internal

• Meets the needs of managers

  • How much money do we have?

  • How do actual costs compare to budgeted costs?

• Tends to be specific purpose, designed with a particular decision in mind

• Not subject to regulation and can be designed to meet the needs of particular managers

• Produced as frequently as needed by managers

How can this info be used?

1. Valuation

2. Stewardship

Valuation

1. Demand for information to predict future cash flows (from investors often)

2. Information relevant to valuation is called VALUE RELEVANT

Stewardship

1. Public companies have a separation between ownership and management, which can mean that managers may not act in shareholders’ best interests

2. Accounting info mitigates this problem because it allows owners to:

   1. Monitor managers’ decisions, outcomes, and align incentives through contracting (ex: setting a bonus if manager hits a certain company target)