Though accounting records and reports a company’s transactions, many different parties benefit from this information. These individuals — called financial statement users — often review the information for decision-making purposes. Financial accounting information also helps users measure a company’s profitability and performance. Interested parties include owners, lenders, employees, suppliers and government agencies.
Owners are typically the most interested user of financial statements. Not only do owners have an interest in profits, but also in the amount of money they retain for personal income. This information comes from the income statement. Owners want to know how much capital the business consumed in order to generate sales revenue.
Lenders have an interest in both a company’s profit and cash flow. These users may have given loans to the business. Companies with an inability to repay the loans increase the lender’s risk. Lenders often require several months of financial statements for review before lending money. Periodic updates are also necessary to ensure borrowers still have the ability to repay loans.
Employees have an interest in financial statements because they need assurances for job retention. Employees can also have an interest in their company’s stock price, which has a close relationship to the company’s accounting information. Employee stock options may increase or decrease precipitously based on the company’s financial health. Employees need this information to determine if they should buy more or hold their current investment level.
Suppliers often open trade accounts with many companies in the business environment. This allows businesses to pay off purchases over a stated period of time rather than all at once. Suppliers prefer to work with financially healthy companies when selling goods. This often ensures payment in the future. Suppliers looking for new clients may also review financial statements to find profitable and stable clients.
Government agencies — primarily those that assess business taxes — review financial information to ensure companies pay their fair share of tax revenue. Federal, state and local government agencies may have a stake in a company. Oversight agencies may also review a company’s financial statements. Inappropriate or material financial misstatement may result in a fine against a company. These agencies attempt to protect a company’s shareholders.