Practice Activity 2.1 Users of accounting information Identify and explain the information requirements of primary users of general purpose financial report. Also, explain the needs of other users of general purpose financial report. Suggested answers to practice activity 2.1 The primary users of general purpose financial reports are shareholders, finance providers, suppliers, investment professionals and their needs are explained as follows. i. Shareholders: A shareholder is an individual, a body corporate, or an institution that owns unit(s) shares in a private or public limited liability company. A shareholder is a company’s member. By holding units of shares in a company, shareholders provide capital to finance the company. Shareholders are interested in investments that have the lowest potential for loss. Every shareholder is mindful of his or her capital. The expected dividends notwithstanding, a shareholder never wants to lose his principal. Shareholders liquidate their investment in a company the moment they start to lose confidence in a company's ability to make profits.
ii. Finance providers or lenders: A lender is an individual, a body corporate, or an institution that provides funds to a company or business enterprise for an agreed period, expecting that the funds will be repaid with interest. A lender is not a shareholder in a business enterprise or company. For a sole proprietorship that becomes bankrupt, a lender who had previously provided funds to the business must be paid before the owner (that is, the sole proprietor) receives any money. A lender is interested in an enterprise or company's capacity to repay the principal amount (that is, the original amount of the loan given to a company or business enterprise) with interest. The inability of a business enterprise or company to repay the principal with interest is due to liquidity problems in the business enterprise or company.
iii. Suppliers: A supplier is an individual or a body corporate that provides goods or services to another business enterprise or company. A supplier wants to be assured that when they provide goods or services to a business enterprise or company, the latter can pay for them without much delay. A supplier is not interested in excuses for defaults in payment by a business or company even if the goods sold to that business or company were raw materials, semi-finished or finished products. For a business enterprise to pay suppliers for goods or services provided, there must be revenue from selling those or existing goods or services. Although a supplier is interested in a business enterprise or company's ability to pay the invoiced amount for products or services, it is also interested in the company’s profitability. iv. Investment professionals: An investment professional is someone who can advise a client to invest or not in the company based on knowledge of financial and other information about a company. An investment professional advises clients about potential risks and estimated future returns likely to emanate from a company. Therefore, based on the knowledge of potential risks and estimated future returns, an investment professional advises a client to invest or not. The needs of other users of general purpose financial reports are explained as follows. i. Customers: A customer is an individual, a company, or an institution that buys goods or services sold by a business enterprise or company. A customer is interested in whether to buy inventory or not. The availability of inventory depends on the continuous operations of a business. A customer seeks to know whether a company can continue in business and meet their orders. It could be devastating to invest money in a company's product and later find out that it cannot fulfill them.
ii. Labour unions: A labour union is an organised association or body of workers (usually employees) in a trade, profession, or industrial sector to protect their individual and collective rights and interests. A labour union is also known as a trade union. Based on information available in financial statements and other corporate communication media, labour unions are interested in whether to demand more pay for union members (or employees) or not. Labour unions usually advocate for the improved welfare of employees. They are also interested in pension contributions by employees and employers, ensuring that employers maintain their pension contribution and remittance to the relevant body for investment to ensure that employees have the finance to depend upon retirement.
iii. Relevant tax authority: Every government is interested in the ability of individuals and companies to comply with payments of relevant taxes. A company or business entity is required to pay tax on profit. The determination of taxation is subject to accounting information made available to the government and their authorised representatives saddled with tax collection. iv. Industry regulator: Other Government authorities interested in accounting information include the Securities and Exchange Commission and Stock Exchange. v. Managers: Although managers have other sources of information beyond annual reports, they are interested in whether the performance and position in financial terms need improvement. Managers use financial information to determine whether the company has sufficient resources to generate enough cash inflows. The performance of managers is appraised using accounting information. vi. Authority or authorities representing the host community: Host communities provide the working environment where companies and their employees work. Therefore, for a company to work successfully and achieve its set goals, there must be proper support from host communities. Authorities representing the host community are interested in how community members are employed, the extent of use of the community's resources by a company, environmental protection, social responsibility, and sustainable development initiatives. Therefore, the knowledge of these issues from annual reports and other corporate communication media will enable the host community to determine whether to allow a company to expand operations or not in the host community.
vii. Competitors: Competitors are those business enterprises or companies in the same industry or sector as a company. Over the years, competitors use the financial and market indicators of companies to determine whether to continue in business or not. The decision to continue in business means that competitors are optimistic that they will not be edged out of the industry. The decision by competitors to discontinue business means that based on the financial, market, and other indicators, they cannot meet up with the company's performance in question. viii. Employees: Consequential from a company’s plans, profits, and economic resources, ability to repay obligations, and net worth, its employees will determine whether to continue in the employment of that company or not. They will also determine whether to demand more welfare and increased remuneration.
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