- Identify users of accounting information
The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. There are three primary users of accounting information: internal users, external users, and the government (which is a specific form of an external user). Each group uses accounting information differently and requires the information to be presented differently.
Internal users are owners and managers involved in the day-to-day operations of the business and in long-term strategic planning. They are the ones who are making decisions such as whether to lease or buy equipment or to keep the old equipment and simply keep repairing it. They also decide what products or services to produce and how much of each to supply. They decide on the price to charge to customers, and they want to know how much it costs to make a product.
The external users of accounting information fall into five groups; each has different interests in the company and wants answers to unique questions. The groups and some of their possible questions are:
- Prospective and current board members or investors. Has the company earned satisfactory income on its total investment? Should an investment be made in this company? Should the present investment be increased, decreased, or retained at the same level? Can the company install costly pollution control equipment and still be profitable?
- Creditors and lenders. Should a loan be granted to the company? Will the company be able to pay its debts as they become due?
- Employees and their unions. Does the company have the ability to pay increased wages? Is the company financially able to provide long-term employment for its workforce?
- Customers. Does the company offer useful products at fair prices? Will the company survive long enough to honor its product warranties?
- General public. Is the company providing useful products and gainful employment for citizens without causing serious environmental problems?
The government is a separate type of external user that is also interested in a company’s performance, mainly for purposes of collecting the proper amount of tax, but also for other regulatory purposes. In fact, a single company may be reporting to several state and local governments and even to foreign governments, depending on where they are doing business.