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Users of Accounting Information (A1: Rags to Riches (it was considered…
Users of Accounting Information
External Users
Customers
they are the main source of income of a business
businesses aim to widen their reach by targeting multiple customers segments
Everyone has become a customer at some point
even large businesses
People and Entities that acquire goods and services for a fee
the one user group that is particularly interested in the accounting info of a business
analyzing the accounting info of a business helps customers determine if it will be profitable for them to transact with the business
essential if the customer plans to build a long-term relationship with the business
receives financial reports
the reports hint at the quality of products and services of a business
if the reports or statements are showing losses, the products or services of the company are not of high quality
in this case, customers will most likely go or veer away from the company
there needs to be shown its capabilities in honor obligations
note the income of the company
the income is a good indicator of the profitability of a company
customers will take minimal risk if they decide to deal with the company
they will try to know the future commitments of the company
:red_flag: Examples of Future Commitments
Creditors
they are the additional funds that help operate the business
since some businesses require this
in the early days the contribution of owners or investors is the fuel that drives the company forward
lend their resources to the business in exchange for a fee
the fee charged by the creditors is the payment for the use of their resources
money loses its value overtime
this is why creditors ask for a fee
they will be inclined to lend if the company exhibits a stable income and is consistent in its results
they're unlikely to lend if the company is too risky
the rule of thumb is "high risk, high return"
3 Main Factors Before Lending
Riskiness of lending
Profitability of the company
Company's amount of borrowings
before they grant loans to the business, they first examine the financial statements
their biggest fear is that they will not get 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
this is why creditors examine the financial statements of a company
similar to customers they observe the profits of a company
they will be concerned because the profits will be the funds available to repay them
they feel more secured that the company will not default on its debts
they look at the amount of borrowings the company has
Not having high profits mean not a huge amount of debts
:red_flag: Example of Creditor Debt Scenario
:red_flag: Examples of Creditors
Potential Investors
comparable to creditors
they may also provide the additional fuel to drive the company forward
they put their resources in a business hoping to earn a decent amount of return
unlike creditors they may win or lose in their investment
investing in business is a gamble
For the risks they take
they normally could earn more profits than creditors
enjoy no limit on the amount of profits they can receive
if the company you invest in is doing well, expect a large amount of profit
if the opposite you might even lose everything you invested
the level of profits presented in the financial statements is a primary concern for investors
investors also evaluate the company's financial ratios to get a feel of how the company operates
everyone can be an investor if you have the resources to place in the company's stewardship
businesses can invest in other businesses as well
financial statements provide the necessary info to decide if they will invest in the business
they can be more afraid then creditors of the possibility that they will lose their money
if the assets are less than the liabilities creditors are paid first before investors
investors estimate the risk associated with investing in the company
investors seek companies that can give them a decent return in their investment
but it doesn't mean they invest only in non-risky companies
some individuals do invest in companies that are risky
some invest in start-ups
Government
a user of a company's financial statements
they can invest or lend money to the business but it is only a possibility
in the taxing authorities
use the financial statements to compute for the right amount of taxes payable by a company
Company's desire to pay lower taxes might encourage them to understate revenues and overstate expenses to harm the public
this is a wrongdoing that taxing authorities can't tolerate
the main purpose of government is to regulate the businesses in the economy
there are thousands of businesses interacting with one another
the businesses especially the large ones are scrutinized by government
Different government agencies are assigned to check
they check if the business is not deceiving the other users of financial statements by misrepresenting the amt. of earnings/manipulating portions of the company's financial statement
this is crucial to prevent financial collapse like what happened during the Enron bankruptcy
the look at the income, revenue, and expenses of a company
they want to ensure companies don't overstate their income to attract more investors and creditors
Academe
this includes professors, researchers, students etc.
benefit from the accounting info in the financial statements
they do not transact with businesses
they utilize the financial statements for academic purposes
although this is not only limited in the accountancy field but also in banking and finance, entrepreneurship, and economics
they take advantage of how the financial statement tells a story about how the company operates
:red_flag: Examples of Academe in how they take advantage of the financial statement
professors and students get an idea on how the industry operates
they help students learn more in the field of accountancy
some TBs contain samples of financial statements
researchers study the financial statements to identify particular trends in a specific industry or economy as a whole
it can greatly help the government in assessing the condition of the economy
they can search for loopholes and possible improvements in the accounting standards currently being used
Public
they are the last group considered to be an external user
Companies affect the whole economy
companies create jobs for the public
the results of a company operations also pull the economy toward growth or recession
the statements provided give us hints about the condition of the economy
if it falls, the public cuts their spending and increases their savings
if it prospers, the contrary is true
the public can properly respond to various economic cycles
aside from consumption and spending other decisions of the public that can be affected involve
starting a business given the current economic condition
staying on current job or find a higher paying job
best use of a person's resources
determining the optimal level of savings and consumption
the list goes on
Intro
Successful businesses must interact with countless customers, investors, creditors, and other groups
these outside parties are the main sources of income &/or funds that are key factors in determining if a business will be profitable or not
HOW?
Communication of Accounting Information
the parties are empowered to make better economic decisions
Financial reports supply the info these groups demand in order for them to make decisions connected to the business
it is the common misconception that the users of accounting info include only outside parties
employees of the company especially managers also use accounting information to make well-informed business decisions
the success of a business heavily depends on the people running it
General Purpose Financial Statements
intended to provide info to those who do not have the capability to request directly from the company
it is not wise for a company to produce financial reports that cater to each specific need of these user groups
should contain a info that can possibly answer the inquires of a wide range of interested users
Special Purpose Financial Statements
based on requests of parties that have the capability to ask for accounting info directly from the company
:red_flag: Examples of Groups
no known business transacts with itself
A1: Rags to Riches
SM is an avenue for almost anything you desire to do
SM truly "got it all for you."
BUT SM is no exception to the struggles faced by all start-up businesses
SM: the most recognizable 2 letter combo in the Philippines
it was a shoe store
it was considered exceptional with a new store layout and merchandising concepts never before seen in the country
success and expansion of SM are partnered with a growing customer base
SM is closely watched by government agencies since is a large player in the economy
its beneficial for both the company and outside parties if SM provides such info needs
In the past, SM need not produce financial reports to cater to the info needs of interested parties
Investors are interested in companies that share in its success
Creditors are now more willing to lend the company since it is assured it is capable of paying
Examples of Customers
Regular Customers
People who have households that avail the services of Maynilad or Meralco
People buying shampoo in a sari-sari store
People having a haircut by the local barber
Business Customers
Restaurants buying from their trusted suppliers to get livestock for their product
Examples of Future Commitments
plans for expansion of the business
discontinue a business segment
Illustrative Example: Customer
Patricia Plans to Organize a Furniture Shop
:warning: Read from Book
Examples of Creditors
Banks
Lending Institutions
Wealthy Individuals
Government
Example of Creditor Debt Scenario
profits for company for 2014 totaled 2M and its demandable debt amounts to 3M
Illustrative Examples: Creditor
Amadeo Co.
:warning: Read from book
Illustrative Example: Potential Investors
Aryana is a successful career woman
Read from Book :warning:
Internal Users
Management
composed of employees within the company that can implement decisions affecting the company's operations.
Board of Directors
Top management
middle-level managers
supervisors
common classes of employees belonging to the management group
all are called "managers"
they function as the brain of the company
pertaining to company operations is often given to them
they should know the company inside and out by examining financial statements
problems faced include
areas of business becoming problematic
underperformed segments of the business during a certain period
level of company's expenses becoming alarming
company's handle on debt
company utilizing its resources efficiently
Employees
they take a look at the company's financial statements
they use these primarily for personal reasons
they are concerned with the company's profitability
if the company is profitable, employees feel that they will receive their compensation and additional benefits
additional benefits
year-end bonuses, fringe benefits, remuneration packages, termination pay
the condition of a company affects his/her morale and performance
Illustrative Example: Responsibilities of the BIR for the Assessment and Collection of taxes from its constituents
Read from Book :warning:
Examples of Academe in how they take advantage of the financial statement
class plans to study the footwear industry
they look at financial statements of Adidas and Nike
Illustrative Example: Academe
Zed is currently enrolled in a BSA program in the Philippines
Read from Book :warning:
Illustrative Example: Management
Fix It Beauty Salon is one of the most successful salons in the country
Read from Book :warning: