Internal vs External Financial Reporting Overview, How They Work, Uses

For example, they may want income statements for each product line or store rather than for the business as a whole. Lenders, such as banks, and creditors, which may include suppliers offering payment terms, look at the balance sheet to examine the company’s assets, liabilities, and equity. They want to see that a company has sufficient assets to cover its debts, both in the short and long term. A healthy balance sheet can reassure lenders and creditors that a company is unlikely to default on its obligations.

Owners/Partners – Owners are the legal stakeholders of the business and the ultimate signing authority. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs.

Who are the Users of Accounting Information?

Publicly traded companies are required by the SEC to issue financial statements every quarter along with a set of other documents included management analysis and discussion as well as important notes. These reports must also be audited by a certified public accounting firm to provide investors and creditors with assurance that the financial statements are understandable and an accurate representation of the company. If the financial statements are misleading or confusing to external users, the auditors must report these findings to the public by issuing something other than an unqualified opinion.

  • They all rely on the same set of financial statements to gain insights into the company’s financial position, profitability, and cash flows.
  • An outcome of this examination can be a change in the amount of credit extended to a business.
  • For example, information derived from a computerized accounting system is often the starting point for obtaining managerial accounting information.
  • Government agencies, including regulatory bodies and taxing authorities, also use financial statements to monitor the financial conditions of the companies they have jurisdiction over.

Accounting information also helps creditors to make decisions about whether to offer loans to a business in the future. Creditors use accounting information to evaluate creditworthiness and other factors since this helps to guarantee that the loan will be repaid in the future. Accounting information shows the future potential of the business in terms of future profits for investors. Investors are the people who are ready to invest their money in a business. Investors who are looking for business opportunities can only make correct decisions based on high-quality accounting information.


A company can also use an internal financial report to track current customers and monitor how credit customers are paying back credit. The management uses the report to see how well credit customers are honoring their credit terms. Internal financial reports may be used to provide information about employees. The management may require internal employee reports that provide information on employee performance, operational efficiency at the department level, whistleblowing activities, etc. The management may use the reports to make decisions on promotions, deployment, and layoffs.

Trade Creditors or Suppliers

In conclusion, financial statements are increasingly critical for investors and creditors in the future. This article has assessed the importance of financial statements to potential investors and creditors by using quantitative data in conjunction with a qualitative factor. In addition, an interpretation of specific ratios with the use of numerical data presented in financial statements considerably receptionists influences the investment decision of investors and financing decisions of creditors. Finally, to produce sound decision-making, a qualitative factor measuring the reliability of financial statements should be aware. Thus, it is suggested that an internal audit team who knows well about the organization should be appointed in order to detect fraud such as ‘window dressing’ early.

What Are Financial Statements?

As a result, the government is interested in learning about the traders’ income-expenditure, import-export, production, distribution, and other financial data. They invest in a company if they see in the review that the lending is safe, the dividend rate is relatively high, and the return on investment is available at the end of the term. Internal audit work frequently involves using various types of financial statements, accounts, and books by the auditor.

General-purpose financial statements provide much of the information needed by external users of financial accounting. These financial statements are formal reports providing information on a company’s financial position, cash inflows and outflows, and the results of operations. Many companies publish these statements in annual reports, also known as a 10-K or a 10-Q (quarterly report). The annual report contains the independent auditor’s opinion as to the fairness of the financial statements, as well as information about the company’s activities, products, and plans.

Financial Accounting Scheme Of Work For SS1 For 2022/2023 Session

Understanding the needs of each user group allows companies to prepare these statements more effectively, meeting their regulatory obligations while also providing useful information for decision-making. Non-managerial employees form part of the operations of the company but do not participate in decision-making. Employees want to know if the company has the ability to pay remuneration and benefits. Labor unions review the financial performance and condition of the company before making demands on salary increase, employment benefits, and other labor matters.

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