Accounting
involves the process of ‘collecting, analysing and communicating financial
information’ in order to make informed decisions (Atril and McLaney, 2008 page
2). This information helps various users to assess different courses of action
relating to the financial performance and position of the organization (FASB
2012). Accounting information is being used and utilised to make decisions by
internal users for example managers and employees and external users, such as
investors, creditors, government, and customers. This essay will critically
discuss the usefulness and importance of accounting information of these users
and how it helps make informed decisions.

 

The
majority of these users treat the financial statements as the main source of
information in order to make decisions. The full disclosure principle states
that if the information is important, useful, and has the ability to help users
make decisions, then it should be disclosed (FRC 2012). Disclosing information
that is relevant and clear for users can improve decision making. This is
supported by PWC (2014), claiming that providing company-specific information
will help to produce useful information and reduce an overload of information.

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The
various users of accounting information have different purposes, however, the
quality and standards of the information presented must stay consistent.
(Alexander et al., 2011), states that faithful representation and relevance are
the fundamental characteristics for accounting information to be useful. For
the information to be relevant, it should contain a confirmatory and predictive
value. (IFRS Foundation 2010), states that if accounting information is
relevant, this can give users certainty and accuracy in order to make effective
decisions. The concept of faithful representation is concerned about making
sure financial statements are free from bias, neutral, and complete. (Atril and
McLaney, 2008) argues that accounting information should enable users to make
useful decisions which can be achieved by neutral information and not
unreliable information. Moreover, (IFRS Foundation 2010) identified four main
qualitative characteristics that can enhance relevant and faithful reports
including timeliness, verifiability, comparability and understandability. (Bazley,
Nikolai, and Jones, 2009), claims that decision usefulness should be the
overall characteristic in judging the quality of accounting information. Also,
accounting information should provide information in which the benefits
outweigh the costs (Atrill and Mclaney, 2008).

 

Investors
extract necessary accounting information to assess whether or not to invest in
a company. This requires the use of financial statements to understand the
entity’s economic resources and financial performance during a period. They are
concerned with the risk and return on investment and the ability of the entity
to pay dividends (ICAEW 2011). Accounting information is used to determine
whether they should buy, sell or hold shares. European surveys revealed that
the income statement is the most effective form of accounting information for
investors (Cascino et al., 2014). This is because investors are interested in
their potential profits and this can be estimated from the company’s past
performance as shown in the income statement. Recently, Pearson PLC announced a
30% fall in shares, a profit loss of £60million, and a cut on dividends (BBC,
2017). Investors would view this as a bad indication of the performance of the
company. Investors are interested if a company can pay dividends and accounting
information is useful. (BskyB Ltd 2015), revealed a 3% increase in dividend.
This would attract investors more, therefore, accounting information is useful
in decision making.

Although
financial statements provide information useful to investors, they have some
limitations. A critical assumption is that information from the past will
predict future outcomes. This is usually true, however, there is no guarantee
that the company would perform as expected. In order to make well-informed decisions
about the company, financial statements should be transparent. For example,
Enron was declared bankrupt in 2001 due to a lack of transparency. This creates
a problem for investors because without knowing the amount of debt owed,
investors will not be able to assess their vulnerability to bankruptcy. This
lack of transparency made investors lose shares of up to $11billion (Li, Y.
(2010). (M. Bushman and J. Smith, 2003), argued for the importance of
transparency because less information means more uncertainty for users
especially investors, therefore managers and owners should report reliable
information. (Eccles et al., 2002) supports this view by arguing companies with
full disclosures win more trust from investors, thus making effective and
better-informed decisions.

 

Creditors
including Lenders and Suppliers are external users. Lenders such as financial
institutions provide finance on a long term basis. (Alexander and Nobes, 2013),
states that the balance sheet enables lenders to see if the organization has
the ability to repay loans and interest when it is due or if it is creditworthy
to borrow additional funds. Lenders are able to assess the sustainability and
liquidity of the borrower from financial statements and can impose loan
covenants for businesses which can limit their borrowing. Financial statements
prove to be useful as it can provide evidence if the loan covenant conditions
are being met. However, (Elliott and Elliott, 2013), suggests that accounting
information may not be so much useful because of the different timescales of
users. For instance, a lender would need to see if a business can repay the
money within three months but the information is reported annually.

 

The
balance sheet allows suppliers to decide if they want to sell to the entity or
if it is likely that amounts owing to them will be paid when due (ICAEW, 2011).
For example, if a company orders 50,000 units from a supplier, the supplier
needs to know beforehand whether the company is able to pay for these units.
Therefore, the information must be relevant and faithfully represent what it
aims to represent. The supplier can make a decision based on the balance sheet
to see if the business is able to make payments. The amount due is called a
trade payable. However, the balance sheet can be used for the wrong purposes by
companies. To give an example, in 2016, accounting information revealed that
Tesco had avoided paying suppliers just to improve its own financial position
(Simpson, 2016).

 

Customers
have an interest in the accounting information for assessing the financial
position of a business, as it enables to maintain a steady source of business
for the future. Customers want to know if the entity has enough resources to
survive. The financial statements provide useful confirmation of the
reliability of the entity itself as a continuing source of supply. For example,
Domino’s Pizza annual report of 2014 states under the going concern principle,
that groups have adequate resources to continue in existence for the
foreseeable future (Domino’s Pizza Inc. 2014). This relates to one of the main
objectives of accounting, to provide relevant and useful information.

Governments
require information for decision-making purposes. (Elliott and Elliott, 2013),
states accounting information is used to regulate the activities of entities,
assess taxation, to allocate resources and provide a basis for national income.
HMRC which acts on behalf of the UK government collects company’s annual
accounts as a basis to make useful and effective decisions. This information is
used to see whether the company complies with tax laws and if it has paid the
right amount (Alex et al). Moreover, (Chen and Vijayaram, 2013), claims that
governments also use accounting information to financially assist companies
that provide social activities known as Corporate social responsibility. This
is largely beneficial for the entire society.

 

The
internal users of accounting information are referred to as the individuals who
are directly involved in the day to day activities of the business organization
such as managing, operating, planning and controlling. These include managers
and employees. Managers need accounting information to analyse the company’s
performance and position (Alexander and Nobes, 2013) states, the information is
useful for them because it will help them more easily to manage the business
efficiency, to take effective control and plan decisions in the future. Not
only is the information useful but it can be very detailed and specific to
their needs which can improve decision making and usefulness.

 

Employees
are interested in information about the economic stability and profitability of
their employers. (ICAEW, 2011), states employees use financial information
about the business for fair and open collective bargaining such as wage
negotiations and to assess the companies present and future job security. Much
of this also requires specialized and detailed information. It may be necessary
that the business stays profitable so that customer’s needs are satisfied. For
the information to be useful, it must be clear and understandable. Also, it may
be useful to supply information on a frequent basis rather than waiting for an
annual report which is slow to arrive and more general in nature.

 

Overall,
this essay has reviewed the various users of accounting information and their uses.
It can be concluded that the significance of using accounting information is
useful for decision making.  In order to
be useful, the information provided has to fulfil the qualitative
characteristics such as relevance and faithful representation. Accounting
information is very important because it is the base of making informed
business decisions.