By demand and supply of financial statements, we mean the users and supplier of financial information. These are the interested parties in financial statements. Financial statements are prepared to meet the objectives and requirements of these users. Therefore, the preparer of financial statements must have the interest of these people in mind when preparing the financial information. Different users have different purposes for financial statements, therefore, when preparing financial statement interest of the various users must be taken into consideration.
Major users of financial statement include but not limited to the following: managers and employees, shareholders and directors, customers and strategic partners, creditors and suppliers, regulators and tax authorities, investment analysts and information intermediaries. We shall analyse these users and the purpose for which they require the financial statements.
Managers and employees: For their own well-being and future earnings potential, managers and employees demand financial information in order to ascertain the financial condition, profitability, and prospects of their companies as well as comparative financial information on competing companies and business opportunities. This allows them to compare their company’s performance and condition. Managers and employees also demand financial accounting information for use in compensation and bonus payments that are tied to such financial information. The popularity of employee profit sharing and stock ownership plans has further increased demand for financial information. Other sources of demand include union contracts that link wage negotiations to financial information and pension and benefit plans whose solvency depends on company performance.
Shareholders and directors: Shareholders and directors demand financial statement information to assess the profitability and risks of companies. Shareholder and others (such as investment analysts, brokers, and potential investors) search for information useful in their investment decisions. Fundamental analysis uses financial information to estimate company value and to form buy-sell shares strategies. Both directors and stockholders use accounting information to evaluate managerial performance. Managers similarly use such information to request an increase in compensation and managerial power from directors. Outside directors are crucial to determining who runs the company, and these directors use accounting information to help make leadership decisions.
Customers and strategic partners: Current and potential customers demand financial information to assess a company’s ability to provide products or services as agreed and to assess the company’s staying power and reliability. Strategic partners wish to estimate the company’s profitability to assess the fairness of returns on mutual transactions and strategic alliances.
Creditors and suppliers: Banks and other lenders demand financial information to help determine loan terms, loan amounts, interest rates, and required collateral. Loan agreements often include contractual requirements, that restrict the borrower’s behaviour. For example, loan contractual agreement might require the loan recipient to maintain minimum levels of working capital, retained earnings, interest coverage, and so on to safeguard lenders. Suppliers demand financial information to establish credit terms and to determine their long-term commitment to supply chain relations. Both creditors and suppliers use financial information to monitor and adjust their contracts and commitments with the company.
Regulators and tax authorities: Regulators and tax agencies demand financial information for public protection and setting tax policies. Timely and reliable information is crucial to effective regulatory policy, and financial information is often central to social and economic policy.
Investment analysts and information intermediaries: Investment analysts and other information intermediaries, such as financial press writers and business commentators, are interested in predicting companies’ future performance. Financial reports reflect information about past performance and current resources available to companies. These reports also provide information about claims on those resources, including claims by suppliers, creditors, lenders, and stockholders. This information allows analysts to make informed assessments about future financial performance and condition so they can provide stock recommendations or write commentaries.
Some of these users may sometimes have conflicting requirements and the ability of the preparer of the financial information to be able to balance these conflicting requirements goes a long way in managing divergent requirements.
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