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Users of Financial Statements


The information given in the Financial Statements is of much interest to a number of external parties. These include the following-
  1. Investors - Shareholders or proprietors of the business are interested in knowing the financial position, earning capacity and growth prospects of the business . since they are not generally involved in the day-to-day working of the organization, they come to know the results of the operations and the financial position of the business only through these Financial Statements.
  2. Potential Investors - Like shareholders, potential investors are also interested in knowing the financial position, earning capacity and its prospects for growth of the business. They are also interested in knowing how safe their investments will be. Financial Statements help them assess these factors.
  3. Lenders - Lenders to the business like debenture holders, suppliers of loans and leases are interested in knowing the short - term as well as long - term solvency positions of the entity. They are interested in assessing the long - term solvency to ascertain whether the entity will be able to pay the debentures/loans on maturity. They are interested in assessing the short - term solvency position to ascertain whether the entity will be able to service the debt i.e., it will be able to pay interest/lease rentals as and when they become due.
  4. Suppliers and Trade Creditors - They are interested in knowing about the solvency of the business, i.e., the ability of the enterprise to meet its debts when they fall due. Trade Creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent on the enterprise as a major lender.
  5. Government and their Agencies - Government and their agencies need financial information to regulate the activities of the enterprise, determine taxation policy, complication of national income statistics etc.
  6. Public - Enterprises affect the public in a variety of ways. For example, the activities of an enterprise largely influence the local economy. So, the public at large is interested in knowing the progress of an enterprise which they may understand from the Financial Statements.
  7. Tax Authorities - More particularly, income - tax authorities are interested in knowing the profits of the business so that income - tax can be imposed thereon. Similarly, sales tax authorities are interested in the sales and excise authorities in the production of goods. Financial Statements help them a great deal in determining the taxes payable.
  8. Stock Exchange - Stock exchange is an institution which facilitates dealings of sale and purchase of shares and debentures of companies. It gives information about companies to their members who take interest in financial statements because they provide useful financial information about companies.
  9. Employees and Trade Unions - Employees are entitled to bonus which depends on the profits earned. They are thus interested in knowing the profits earned or loss suffered by the business. Financial statements also help them in knowing the same. Financial statements also help the trade unions in negotiating the wages/salaries.
Let us now discuss the distinction between capital and revenue items and their implications in preparing the final accounts.




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