Financial statements are used by different types of users for different purposes like by investors they use financial statements to seek the performance of the entity. The following are the details of users and their purposes to use financial statements.
Investors
Investors in a business entity are the providers of risk capital. Unless they are managers as well as owners, they invest in order to obtain a financial return on their investment. They need information that will help them to make investment decisions. In the case of shareholders in a company, these decisions will often involve whether to buy, hold or sell shares in the company. Their decision might be based on an analysis of the past financial performance of the company and its financial position, and trying to predict from the past what might happen to the company in the future. Financial statements also give some indication of the ability of a company to pay dividends to its shareholders out of profits.
Investors in a business entity are the providers of risk capital. Unless they are managers as well as owners, they invest in order to obtain a financial return on their investment. They need information that will help them to make investment decisions. In the case of shareholders in a company, these decisions will often involve whether to buy, hold or sell shares in the company. Their decision might be based on an analysis of the past financial performance of the company and its financial position, and trying to predict from the past what might happen to the company in the future. Financial statements also give some indication of the ability of a company to pay dividends to its shareholders out of profits.
Lenders
Lenders , such as banks, are interested in financial information about businesses that borrow from them. Financial statements can help lenders to assess the continuing ability of the borrower to pay interest, and its ability to repay the loan principal at maturity.
Suppliers
Suppliers and other trade creditors Financial information about an entity is also useful for suppliers who provide goods on credit to a business entity, and ‘other trade creditors’ who are owed money by the entity as a result of debts incurred in its business operations (such as money owned for rent or electricity or telephone charges). They can use the financial statements to assess how much credit they might safely allow to the entity.
The public
In some cases, members of the general public might have an interest in the financial statements of a company. The IASB Framework comments: ‘For example, entities may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers.’
Customers
Customers might be interested in the financial strength of an entity, especially if they rely on that entity for the long-term supply of key goods or services.
Employees
Employees need information about the financial stability and profitability of their employer. An assessment of profitability can help employees to reach a view on the ability of the employer to pay higher wages, or provide more job opportunities in the future.
Government
The government and government agencies are interested in the financial statements of business entities. They might use this information for the purpose of business regulation or deciding taxation policies.
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