Users of Financial Information

Now think about the stakeholders of Andy and Nick’s company—those who are interested in the company’s financial information.

Owners

Obviously, Andy and Nick are interested as the owners. They've invested in the company and expect a return on their investment. In other words, they expect that their initial $1,000, along with their hard work, will earn profits and provide them with more than $1,000 to split at the end of the summer. 

Managers

Another reason Andy and Nick are interested in financial information is their roles as managers of the business. Although they trust each other, they decide to formally track amounts each takes from the bank account by using a debit card and matching their purchase receipts with online banking information on a weekly basis. Using a spreadsheet, they'll keep a list of each recurring expense, such as gas for the mower and truck. They'll also keep a log with customer names, hours spent for each job, amounts charged for their services, and payments received. Cash payments from customers will be promptly deposited in the bank account. Tracking these financial details will provide answers to the following questions, which will provide Andy and Nick with valuable insights about their business: 

• What are their highest costs?
• Does their pricing structure correspond with the time spent on each job?
• Are they getting paid promptly?
• Who still owes them money for their work?
• Are they making a profit?

The formal record-keeping process also provides control over financial information and assets:

• Utilizing a bank account provides third-party verification of deposits and withdrawals.
• Making prompt deposits safeguards cash received from customers.
• Reconciling the bank statement with purchase receipts helps prevent errors and would uncover any nonbusiness use of funds.
• Documentation of their lawn care jobs helps ensure accuracy in billing and collecting from customers.
• When both owners are responsible for these control activities, they're accountable to each other and less likely to be tempted to cheat each other—in other words, less likely to commit fraud.

Creditors

What about Nick’s dad? Do you think he's interested in how the business is doing financially? He certainly should be. He's a creditor, because he lent Andy and Nick his truck and trailer and expects them to be returned in good condition. He would like to see that the business is profitable to ensure that Andy and Nick have the money to pay for any damages, as promised. (Of course, he also wants his son and his son's friend be successful!)

Government Entities

Andy and Nick will generate income as they conduct business, and the income may be taxed at the federal, state, and local levels. So government entities are also interested in collecting the financial information they need to levy taxes.

Internal Users

As you can see, owners, managers, creditors, and governments have different reasons for needing financial information. Managers are internal users of financial information. They typically need more detailed information pertaining to the day-to-day operations of the business in order to make managerial decisions about issues such as pricing, strategies to keep costs low, and how to encourage customers to pay promptly. The financial reports utilized by internal users are specific to the business and may be in any form beneficial for management use.

External Users

Owners, creditors, and governments are external users of financial information. In many companies, the owners are not involved in managing the business. For example, in public companies—those that have sold shares of ownership that can be traded in financial markets—the owners are investors that may keep their ownership rights for a limited period of time. They're interested in higher-level, less detailed information, including periodic profits, how the corporate resources are invested, the level of debt, and how cash is generated. Creditors and governments, too, need a more general idea of the company’s financial health. Creditors are interested in its ability to repay loans, while governments need limited detail concerning taxable income. Other external users include employees, labor unions, and major customers and suppliers.

Table 1.1. Summary of Company Stakeholders

	Internal	External
User	Managers	Nonmanaging owners Creditors Government Employees Customers Suppliers Local community
How information is used	Use detailed financial information to run the business, reported in any convenient format	Use summarized financial information reported in the financial statements

Four basic financial reports are utilized by most external users: the balance sheet, income statement, statement of changes in owners’ equity, and statement of cash flows. They're presented in a standardized format and, for public companies, must conform to GAAP guidelines. They provide a means for management to communicate the company’s financial information to outsiders. In addition, governments provide their own forms for managers to utilize in reporting the company’s taxable income. The focus in this course is on the communication provided by the four basic financial statements. A fifth report—the statement of comprehensive income—will be introduced later in the course.