Users of Financial Statements may be categorized into
(1) Internal Users and
(2) External Users.
1. Internal Users:-
(i) Shareholders: Shareholders
contribute capital in the business and thus are always exposed to risk. In view
of the risk involved, they are always interested in knowing the profitability,
financial strength and cash position of the company.
(ii) Management: Management has the
responsibility to not only safeguard the investment but also to increase its
value by managing the business efficiently and maximizing profit. The
management makes extensive use of accounting information to arrive at informed
decisions such as determination of selling price, cost controls and reduction,
investment into new projects, etc.
(iii) Employees: Employees are
entitled to bonus at the end of the year besides the salary and wages taken
every month. Bonus is linked to the profit earned by an enterprise. Thus, the
employees are interested in financial statements.
2. External Users:-
(i) Banks and Financial Institutions: Banks and Financial Institutions
provide loans to the businesses. It is natural that the Banks and Financial
Institutions will watch the performance of the business to know whether it is
making progress as projected to ensure the safety and recovery of the loan
advanced. Cash Flow Statement and Segment Reports enable them to assess cash
position and whether the business segments are making progress as planned and
(ii) Investors and Potential Investors:
Investment involves risk and the investors do not have direct control over
business affairs. Therefore, they rely on the available accounting information
and seek answers to questions such as: What is the earning capacity of the
enterprise and how safe is its investment?
(iii) Creditors: Creditors are the
parties who supply goods or services on credit. Before granting credit,
creditors satisfy themselves about the creditworthiness of the business. The
financial statements help them immensely in making such an assessment.
(iv) Government and its Authorities:
The government makes use of financial statements to compute national income
accounts and other information. The information so available enables it to take
policy decisions. Government authorities assess the correct tax dues from an
analysis of financial statements.
Securities and Exchange Board of India (SEBI): SEBI and other agencies like
to study the financial statements to see whether a company is within its limit
and the interest of the investors is well protected.
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