Module No. 1: Introducing Accounting, its Branches and Information Users.

Lesson 3: Users of Accounting information

Learning Outcomes:
At the end of the topic, you are able to:

1. differentiate the branches of accounting;

2. explain the kind or type of services rendered in each of these branches;
3. solved exercises in the identification of the branches of accounting;
4. define external and internal users of accounting data and give examples;
5. identify the type and decisions made by each user;
6. described the type of information needed by each group of users;
7. solve exercises and problems on the identification of users information, types of
decision to be made, and type of information needed by the users.

Time Frame: Week 4 of the Semester.

INTRODUCTION

Hello learners, are you familiar with these two letters “SM”? What’s
on your mind? Are you thinking of a very sophisticated, state of the art and
large building wherein your family, relatives, friends would want to spend
your boredom in this pandemic lockdown? Yes, we all think the same. In
SM Supermall, we enjoyed our shopping, watching our favorite movies at
their IMAX theater, which gives us a unique movie experience and a lot of
mall activities that will overwhelm us in our visit to Davao City.
Thinking about how successful SM companies are, would also
remind us of its late founder and CEO, Henry Sy and his humble beginning.
SM is no exemption to the struggles faced by all start-up businesses. It
started a relatively small customer base, a shoe store with a store layout and
merchandising concepts never seen in the Philippines. The famous shoebox
structure of its malls became the trademark of SM, currently a retail giant.
The success and expansion of SM are partnered with a growing
customer base. Additionally, investors are more interested in investing in
the company to share its success. Creditors are now willing to lend to the
company since they are assured that it has the capability to pay. Being a
large player in the economy, our government agencies are closely watching
them. Currently, SM is one of the largest taxpayers in the country.
In the past, SM need not produce financial reports to cater to the
information needs of interested parties. Nowadays, it is beneficial for both
the company and outside if SM provides such information needs.
In this lesson, we will discuss the different users of accounting data. As you
know, reports are not only for interested outside parties but also for
interested internal parties (Florendo, 2016).
ACTIVITY: Word Search.

C R E D I T O R S T

Q E A C A D E M E L

A O W N E R S Y M B

Z X V B A N K S F G

T E M P L O Y E E S

M A N A G E M E N T

W I N V E S T O R S

V U L E N D I N G X

B M O N E Y L B I R

Find the following words:

1. BIR 6. EMPLOYEES
2. MONEY 7. BANKS
3. LENDING 8. OWNERS
4. INVESTORS 9. ACADEME
5. MANAGEMENT 10. CREDITORS

ANALYSIS
1. How would you describe accounting information?
2. Significance of accounting information in both internal and external users?
3. In your context, how will you use accounting information at your advantage?
4. How will accounting information affect the economic decision of the users?

ABSTRACTION

To be successful, business must interact with countless customers, investors, creditors, and
other groups. There is no known business that is established just to transact with itself. These
outside parties are the main sources of income and/or funds that are key factors in determining if
a business will be profitable or not. Given the importance of building lasting relationships with
these groups, how can a business continue to capture the interest of such groups?
The communication of accounting information is one answer to this problem. By
communicating the accounting information to these different parties, they are empowered to make
better economic decisions. Financial reports supply the information these groups demand in order
for them to make decisions connected to the business. However, it is a common misconception
that the users of accounting information include only outside parties. This is clearly not the case.
Employees of the company, especially managers, also use accounting information to make well-
informed business decisions. After all, the success of a business is also heavily dependent on the
people running it.

Remember: In the world of business, accounting plays an important role to aid in making critical
decisions. The more complex the decision, the more detailed the information must be. Individuals
and companies need different kinds of information to make their business decisions (Label, 2006).

USERS OF ACCOUNTING DATA

External and Internal Users of Accounting

External Users of Financial Statements Internal Users of Financial

Statements

Customers Management
Creditors Employees
Potential Investors Owners / Stockholders
Government Agencies
Academe
General Public

? Each group uses accounting information differently, and requires

the information to be presented differently.
? Why internal users employ accounting information?
It helps them:
• Assessing how management has discharged its responsibility for
protecting and managing the company’s resources;
• Shaping decisions about when to borrow or invest company
resources;
• Shaping decisions about expansion or downsizing.
 ? Why External users employ accounting information? Because
• Stockholders have the right to know how a company is managing
its investments;
• Governments require tax returns and other documents for taxing
purposes and some other matters;
• Banks or lending institutions use accounting information to guide
decisions such as whether to lend or how much to lend a business;
• Investors will use accounting information to guide investment
decisions.

TWO TYPES OF FINANCIAL STATEMENTS PRODUCE BY COMPANIES

1. General purpose Provide much of the information needed by external

financial statements users; like existing and potential investors, lenders
and other creditors in making decision about
providing resources to the entity.

These financial statements are formal reports

providing company’s financial position, cash inflows
and outflows, and the results of operations;

Should contain information that can possibly answer

the inquiries of a wide range of interested users.

2. Special purpose Are usually produced based on the requests of

financial statements internal users;

Some examples of such groups are the board of

directors, managers, employees, and the
stockholders or owners (existing investors).

External Users
Customer

At some point of our lives all of us have been a customer. In a nearby sari-sari store in your
pace when you buy shampoo, you are considered customer. When you have your hair cut by the
local barber, you are considered a customer. When your household avail the services of
DASURECO, you are considered a customer. In a restaurant business for example, they also are a
customer from their supplier of meats and other stuff they need to operate business.
? The point is even the large businesses are also a customer of their own.
 ü Customers are people or entities that acquire goods and services for a fee.
ü Customers are one user group that is particularly interested in the accounting information
of a business. This is especially essential if the customer plans to build a long-term
relationship with the business.
• Why? Let us go back to the restaurant example mentioned above. If a
supplier is having financial difficulties or has a track record of being
unreliable, restaurants will probably not ask for its services or else it would
affect their business operations.
ü Financial information:
• Hint at the quality of products and services the business offers. If a company
is continuously showing losses in its financial statements, it might indicate
that the products and services provided by the company are not of high
quality.
• Indicates company’s capabilities to honor obligation (e.g., warranties and
after-sales services).
• Provides profitability information of their customers.
• A profitable result of operations is a signal that the customers will take
minimal risk if they decide to deal with the company

Creditors

Most large businesses (sometimes, even small businesses) require additional funds to
operate the business. In the early phase of a business, the contribution of the owners or investors
is the fuel that drives the company forward. When the fuel runs out, the business must find a new
source of funds. Possible sources of additional funds are the creditors.

ü Common examples of creditors are banks, lending institutions, wealthy individuals, and
even the government.

ü Before creditors grant loans to a business, they first examine its financial statements. Why?
The main reason why creditors take a close look in a company’s financial statements.
• Their biggest fear is not getting paid the amount due to them.
• No matter how high the interest rates creditors charge, it will not matter if they
cannot claim it in the end.

ü If a company exhibits stable income and consistent desirable results, creditors are inclined
to lend. Meanwhile, if a company is in dire financial conditions, creditors will think twice
before lending.
ü Creditors ordinarily observe the profits of a company for assurance of their money back.
 Remember: The three main factors considered by creditors before lending to a company:
1. Riskiness of lending
2. Profitability of the company
3. Company’s amount of borrowings

POTENTIAL INVESTORS

In some ways, potential investors are comparable to creditors. Continuing the analogy in the
last section, investors may also provide the additional fuel to drive the company forward. Investors
put their resources (usually money) in a business hoping to earn a decent amount of return. Unlike
creditors who are assured to earn the interest and fees, investors may win or lose in their
investment. Investing in a business is a gamble.

ü To compensate investors for the risks they take, they normally could earn more profits than
creditors.

ü Investors Enjoy no limit on the amount of profits they can receive.

• If the company is doing well, investors expect a large amount of profit. If the
company incurs a loss, investors might even lose everything they invested.
ü Investors are mostly wealthy individuals, but businesses can invest in other businesses as
well.
ü Investors take a close look in a company’s financial statements. Why?
• Financial statements provide them the necessary information to decide if they will
invest in the business or not.
• Through the company’s financial statements, investors try to estimate the risk
associated with investing the company.
• Moreover, investors seek companies that can give them a decent return in their
investments.

Remember: Investors are even more afraid than creditors of the possibility that they will lose
their money.

? In the event that a company becomes insolvent. (i.e., assets are less than the
liabilities), creditors are paid first before the investors.

GOVERNMENT
The government is likewise a user of a company’s financial statements. Does the
government plan to invest or lend money to businesses? It is a possibility, but the main purpose of
the government is to regulate the businesses in the economy.
 ü Government’s main role is to scrutinize businesses, especially the large ones.
ü Different government agencies are assigned to check if businesses follow guidelines
provided by law in their operations.
ü Government agencies also see if businesses are not trying to deceive the other users of
financial statements by misrepresenting the amount of earnings or manipulating portions
of the company’s financial statements.
Remember: The government, particularly the taxing authorities, also uses financial statements
to compute for the amount of taxes payable by a company.
? The government particularly looks at the income, revenues, and expenses of a
company.
? Revenues and expenses are closely scanned for taxing purposes.
? The Bureau of Internal Revenue (BIR) is responsible for the assessment and
collection of taxes.

ACADEME
Members of the academe (e.g., professors, researchers, students) benefit from the accounting
information in the financial statements of a company. Although they do not usually transact with
businesses, members of the academe utilize financial statements for academic purposes.

ü Financial statements tell a story about the operations of a company, professors and students
take advantage of this fact.
ü For example, if a class plans to study the footwear industry, they might want to look at the
financial statements of footwear companies like Adidas and Nike. By doing so, professors
and students might get an idea on how the industry operates.
ü Financial statements also serve as a blueprint to help students in understanding the field of
accountancy.

PUBLIC

The general public is the last group considered to be an external user. Why does the general
public concern themselves with the condition of a company even though they do not have any
plans to deal with said company? What are the benefits derived by the general public in the
financial statements of a company?
 ü Companies undoubtedly affect the whole company. By continuing to operate,
companies create jobs for the public.
ü The results of company operations also pull the economy toward growth or
recession.
ü Financial statements give us hints about the condition of the economy. If the
economy is not doing well, the general public cut on their spending and increase
their savings. The contrary is true if the economy is prosperous.
ü By analyzing the financial statements of companies, the public can properly
respond to the various economic cycles.

Internal Users
MANAGEMENT

Accounting information is processed into summarized financial statements not only for the benefit
of external parties. People inside the company are interested users as well.

ü Management is composed of employees within the company that can implement decisions
affecting the company’s operations.
• Members of the board of directors, top management, middle-level managers,
and supervisors are the common classes of employees belonging to the
management group.
• From here on out, we will collectively refer to them as “managers.”
ü Managers often function as the brain of the company, they have authority to make
judgments for the company. Thus, information pertaining to company operations is often
given to them.

Remember: All managers must know the company inside and out. By examining financial
statements, managers are able to identify problems and respond to them accordingly.

EMPLOYEES

Some employees of a business aside from managers, sometimes take a look at the company’s
financial statements. Unlike managers who examine the financial statements to make better
decisions for the benefit of the company, these employees use financial statements primarily for
personal reasons.
 ü Employees are concerned with the company’s profitability. Why?
• If the company they are working for is profitable, employees feel that they will
timely and adequately receive their compensation and additional benefits.
• Job Security
ü The current condition of a company also impacts employee morale and performance.
Companies that are performing well almost always have employees that are motivated.
ü On the other hand, employee demotivation might be the effect of not meeting company
goals.

OWNERS OR STOCKHOLDER

Owners or stockholders are the existing investors of the company. Owners or stockholders already
invest their resources in the company. In other words, they have already taken the gamble. Some
owners or stockholders take an active role in the management of the business while others just
wait for the generation of profits. Whatever their role in the business might be, all owners or
stockholders are interested in the results of company operations.

ü Predominantly, owners or stockholders want to know if their investment will yield

acceptable returns.
? A profitable business keeps its investors happy. As a result:
• investors would not liquidate their ownership.
• even provide additional resources while the business is enjoying success.
• Meanwhile, businesses who fail to achieve desired profit levels usually
result in dissatisfied owners or stockholders.

Application

1. Research and study some of the operational problems faced by managers associated with
the company’s financial condition. Give at least five and give recommendations on each
problem.
2. Cite the difference between creditors and investors.

Closure
Congratulations, you are now done with Module 1 and ready to engage Module 2 lessons