The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. Three primary users of accounting information were previously identified, internal users, external users, and government/IRS. Each group uses
accounting information differently and requires the information to be presented differently. Accounting supplies managers and owners with significant financial data that is useful for decision making. This type of accounting is generally referred to as managerial accounting. Some of the ways
internal users employ accounting information include the following:Users of Accounting Information
Internal Users
External Users
Typically called financial accounting, the record of a business’ financial history for use by external entities is used for many purposes. The external users of accounting information fall into six groups; each has different interests in the company and wants answers to unique questions. The groups and some of their possible questions are:
- Owners and prospective owners. 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?
- Governmental units. Is the company, such as a local public utility, charging a fair rate for its services?
- General public. Is the company providing useful products and gainful employment for citizens without causing serious environmental problems?
Some of the ways external users employ accounting information include the following:
- Stockholders have the right to know how a company is managing its investments
- Federal and State Governments require tax returns and other documents often prepared by accountants
- Banks or lending institutions may use accounting information to guide decisions such as whether to lend or how much to lend a business
- Investors will also use accounting information to guide investment decisions
General-purpose financial statements provide much of the information needed by external users of financial accounting. These financial statements are formal reports providing information on a company’s financial position, cash inflows and outflows, and the results of operations. Many companies publish these statements in annual reports, also known as a 10-K or a 10-Q [quarterly report]. The annual report contains the independent auditor’s opinion as to the fairness of the financial statements, as well as information about the company’s activities, products, and plans. Typically, the best place to find these reports for a public company can be on their website under the Investor relations section. Financial statements used by external entities are prepared using generally accepted accounting principles, or GAAP. We will discuss the language of GAAP further in later sections.
Government/IRS
Government agencies that track and use taxes are interested in the financial story of a business. They want to know whether the business is paying taxes according to current tax laws. The language in which tax-related financial statements are prepared is called IRC or Internal Revenue Code. Tax preparation will be outside the scope of this course.
Important Points to Remember
- Internal users are people within a business organization who use financial information. Examples of internal users are owners, managers, and employees.
- External users are people outside the business entity [organization] who use accounting information. Examples of external users are suppliers, banks, customers, investors, potential investors, and tax authorities.
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Accounting Information and Decision-Making: Some Behavioral HypothesesThe Accounting Review
Vol. 43, No. 3 [Jul., 1968]
, pp. 469-480 [12 pages]
Published By: American Accounting Association
//www.jstor.org/stable/244070
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Journal Information
The Accounting Review is the premier journal for publishing articles reporting the results of accounting research and explaining and illustrating related research methodology. The scope of acceptable articles embraces any research methodology and any accounting-related subject. The primary criterion for publication in The Accounting Review is the significance of the contribution an article makes to the literature.
Publisher Information
The American Accounting Association is the world's largest association of accounting and business educators, researchers, and interested practitioners. A worldwide organization, the AAA promotes education, research, service, and interaction between education and practice. Formed in 1916 as the American Association of University Instructors in Accounting, the association began publishing the first of its ten journals, The Accounting Review, in 1925. Ten years later, in 1935, the association changed its name to become the American Accounting Association. The AAA now extends far beyond accounting, with 14 Sections addressing such issues as Information Systems, Artificial Intelligence/Expert Systems, Public Interest, Auditing, taxation [the American Taxation Association is a Section of the AAA], International Accounting, and Teaching and Curriculum. About 30% of AAA members live and work outside the United States.
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