I have discussed how accounting affects anybody whose sees money as something important in life. In this post, I am going to discuss who needs and uses the report generated by accounting process.
In general, who does use accounting report?
The short answer is “business people”—the people whose involves or has an economic interest in a business (small or big, individual or organization, solo or corporation, private or government.)
Who does use the Accounting Report of Apple Inc.?
The short answer is: people whose has an economic interest in the Apple Inc. and need financial information for making a decision.
But, who are they exactly?
There are two types of reports generated by the Accounting for two categories of user, as follows:
1. Management Accounting Reports – focuses on the information needed for planning, executing plans, and controlling costs of the business. The reports generated by management accounting are for that individual whose involves in managing and directing day-to-day business activities and need financial information for making decisions. Collectively, this group of individual is referred to as “Management” and categorized as “Internal User.”
Managers and executives who work inside Apple Inc., in the above example, have access to specialized management accounting information that is not available to outsiders. In addition to the management reports, the directors of the business also use Financial Statements.
2. Financial Accounting Report (called ‘Financial Statements’) – The information provided by financial accounting is summarized in the three primary financial statements as follows:
- The balance sheet – reports the resources of a company (called ‘assets‘), the company’s obligations (called ‘liabilities‘), and the owners’ equity, which represents the difference between what is owned (assets,) what is owed (liabilities,) and what is the net value of the business (called ‘net assets.‘)
- The income statement – reports the amount of net income earned by a company during a period, with annual and quarterly income statements being the most common. Net income is the excess of a company’s revenues over its expenses. If the expenses are more than the revenues, then the company has suffered a loss for the period. The income statement represents the accountant’s best effort at measuring the economic performance of a business; how profitable the business is.
- The statement of cash flows – reports the actual amount of cash-in and cash-out in operating activities, investing activities, and financing activities, of a business.
The statements are issued for individuals or organizations whose do not involve in the day-to-day business activities (or have no access to the management accounting reports) but have an economic interest in the business and collectively categorized as “external users.”
Included in the external users are creditors, investors, suppliers, customers, government agencies, employees, and the press.
(Note: Here at AccountingLog.com we discuss management accounting, financial accounting, tax accounting, auditing, and accounting for specific industries, heavily. In the coming post, I plan to discuss further the area of accounting in more details as part of the introduction series.)
Why do they need accounting reports?
Each user has different economic interests in the business thus needs to make different decisions which I am going to elaborate a little bit more on the next paragraphs. Read on.
1. Management (Internal)
The management is individuals whose involve in managing and directing the business day-to-day and get rewards (salary, bonuses and other benefits.) The management in the case of Apple Inc. above are the directors and managers whose involve in directing and managing business activities of Apple Inc.
Each manager and director in the business has different goals, involves in different activities, and takes different decisions, day-to-day, to achieve their goals. So each manager also needs differents management accounting reports. For examples:
(a) Research and Development (RD) Manager – wants to develop products or services that not only make good sales but also make a good profit.
In the case of Apple Inc., the RD Manager is expected to develop a new iPhone 8 with a certain targeted market at a certain targeted price (based on the prior research.) Not only make good sales, the new iPhone 8 is also expected to make a good profit for Apple Inc.
To make that happened, the RD manager would need to compare the targeted price with the targeted cost (based on the expected features of the research) and see whether or not the new iPhone 8 will capable of making a good profit.
That means that the RD Manager needs the “Bill of Materials” report from the accounting system. If the actual Bill of Material higher than the targeted cost, then the manager has to decide whether reducing the features of the iPhone OR increasing its targeted price.
(b) Sales and Marketing Manager – wants to launch a new product and need to make marketing campaigns prior to the launch date.
In the case of Apple Inc., the Marketing Manager schedules the launch of new iPhone 8 by the second quarter of 2017. But, a recent press release says that Samsung’s flagship S8 also coming on its way to the market in the same quarter.
The manager has to decide whether to involve in marketing war with a higher cost which will affect the profit OR postpone the launch date. Again, the manager would need to analyze the cost of marketing carefully before making the decision.
(c) Purchasing Manager – wants to purchase raw materials (and other supplies) from vendors that meet the company’s quality standard, offer the best price with good credit terms, provide a friendly return policy and on time delivery.
In the case of Apple Inc, the manager is expected to purchase the best camera available in the market. But there are five vendors supplied cameras for the previous iPhone 7s and 7s plus. So, where would the manager purchase the camera for the new iPhone 8?
To make a good decision, he has to carefully profile each of the 5 vendors and rank them by reviewing Accounts Payable, discounts, shipping cost, and returning cost, related to each of the vendors in the past.
(d) Production Manager – wants to produce products required by the Sales and Marketing Manager with a certain targeted quality standard at a certain targeted quantity, targeted lead time, and targeted production cost.
In the case of Apple Inc., the manager is expected to produce the new iPhone 8 with features and quality standard required by the RD dept and quantity and lead time required by the Sales and Marketing dept.
Firstly, using the Bill of Material report generated by the accounting system, the manager has to analyze the available machine’s and labor’s capacity to see whether or not he is capable of meeting all the targets.
If not, secondly, he has to find a way to meet all targets; should he purchase a new machine with new technology and with bigger capacity? OR make over time? OR sub-contract some of the quantity in China? Which option is the most cost-effective without compromising the features and quality of the production outputs?
Finally, to come into the best decision, he has to run a ‘cost-and-benefit’ analyses on each of all available alternatives, at minimal. And to do so he need the previous cost report generated by the accounting.
(e) Finance Manager – wants to get cost-effective sources of money for funding the regular operation of the business and make a good profit, or probably funding business expansions in the near future and generate even more profit.
In the case of Apple Inc., the CEO plans to acquire a prospective tech startup that capable of producing some components needed in the future.
Firstly, the Finance Manager should carefully analyze and make an estimation of cash availability on the acquisition date by using the latest Statements of Cash flow generated by the Accounting.
If the cash availability isn’t sufficient, secondly, then she has to seek other sources of money. Should she factor some receivable? Or sell more shares? Or sell commercial papers belong to the Apple Inc? Or get a bank loan?
To make a good decision, finally, she has to analyze the cost of each above option, how each option will affect future cash flow, and how to anticipate the effects.
(f) Warehouse Manager – wants to store and maintain sufficient quantity of raw materials (among other supplies) for feeding the need of production dept and sufficient finished goods for fulfilling the needs of sales and marketing dept, at the most effective cost, zero lost, and minimal defects.
In the case of Apple Inc., the warehouse manager is expected to maintain an on-hand raw materials inventory (among others supplies) for the production and sufficient on-hand finished goods inventory for the sales of the new iPhone 8 at a certain targeted volume, targeted cost, zero lost, and minimal defects.
To make that happened, firstly, he has to analyze the available capacity of the warehouse for each raw material and finished iPhone 8 by comparing the available space with the planned on hand inventory.
If the capacity is enough, secondly, then he has to come up with a specific storage system and an inflow-and-outflow system to make sure the operation of the warehouse run smoothly. In addition to the system, he also has to make sure the target cost is maintained.
If the capacity is not enough, thirdly, then he has to make a decision whether to reduce the targeted on hand quantity, or expand the space, or rent a space outside. He has to analyze the cost of each option and find out the most cost-effective one. And to do this he needs cost information generated by the accounting.
(g) Human Resource (HR) Manager – wants to have a sufficient number of employees to run the business smoothly at a certain targeted turnover and targeted cost (i.e. hiring cost, training cost, payroll, wages, and various benefits.)
In the case of Apple Inc., the HR manager is expected to have sufficient employee to run the new iPhone 8 project from research to the completion stage at a certain targeted turnover and targeted cost.
To meet the target, firstly, the manager has to analyze the available human and labor capacity and compare it to the required capacity and see if it is sufficient for the new iPhone 8 project.
If not, secondly, he has to make a decision whether to suggest some over time? Or hire more employees? Or outsource some portion of the project?
To make a good decision, he has to make cost analyses for each option and find out the most cost-effective one without compromising the target. And to do this he needs cost information generated by the accounting.
Those are some example of how the management uses the report generated by the management accounting for single strategic decision in the planning stage of a business activity.
I will show you more decision-making models in the execution and evaluation stages by using the accounting information in more details and more actionable forms in the future posts.
2. Creditors (External)
Creditors or lenders are those organizations, commonly banks and other financial institutions, that provide businesses with loans and charge interests. In the case of Apple Inc., the creditors are those banks where Apple Inc. apply loans it needs.
An existing creditor wants to know whether or not the business has the ability to pay the loans that are going to due in on timely manner. And a prospective creditor wants to know about company’s ability to pay the loans it is applying in the short and long period.
The creditors can get the answer by reading the company’s financial statements. The ‘balance sheet’ provides the creditors with information about company’s ability to pay, and the ‘statement of cash flow’ tells creditors about the cash availability.
If you are a small business owner and wanting to apply a loan to fund your business, the bank will definitely want to review the financial statements of the business.
If you don’t have one, they will require a list of asset and copy of checking accounts. The first paper represents a balance sheet and the second one represents the statements of cash flow.
Using the papers they can analyze your ability to pay the loans (principal and interest) in the future.
3. Investors (External)
The investors are those individuals and organizations that invest money in a business and expect a good return on investment (ROI) as a result. In the case of Apple Inc., the investors are those individuals and organizations whose buy Apple Inc.’s shares.
The existing investors want to know how much profit the business made and how much of it will be shared as a cash dividend for the period. And potential investors want to know the ability of the investee in making profit and ROI in the future when they actually invested.
They can get the answer by reading and analyze the investee’s financial statements. The ‘income statements’ tells investors about profit earned for the period, the ‘balance sheet’ tells them about net value and solvency, and ‘statements of cash flow’ tells them about liquidity.
4. Suppliers and Customers (External)
Suppliers or vendors are those individuals and organizations that supply the business with products and services. Some of them may also offer credit and discounts with certain terms and conditions (among other policies.)
Customers or clients are those individuals or organizations that buy company’s products or services. Some of them may get credit facilities and discount from the company.
It is common that the suppliers implement different policies for different customers, depending on the scale of the customer and most importantly is its ability to pay the bills on its due date.
The existing suppliers want to know about company’s ability to pay the bills that getting due and whether or not to change the credit policy. And, the potential suppliers want to know about what credit term and policy could be implemented when they actually supplied.
Existing customers want to know about company’s ability to keep the quality of the product, credit policy, and its after-sales service. And prospective customers want to know what company they going to deal with, whether or not the company is able to provide good quality of products, good credit policy, and good after-sales service.
Financial Statements answers all their questions.
5. Government Agencies (External)
Government agencies are those institutions that enforce law and regulations related to businesses such as the Internal Revenue Services (IRS) and Security Exchange Commission (SEC) in the United States.
The IRS wants to know whether or not the business has followed the IRS’s codes in paying and filing the taxes accordingly; what amount of tax supposed to be paid and what has actually been paid by the business. And the SEC wants to know whether the public entities has followed SEC’s codes in reporting financial activities.
Both IRS and SEC need to review the financial statements.
6. Competitors (External)
Competitors are those individuals or organizations that sell similar products (or sells different products but have the same functions) to the business. In the case of Apple Inc., Samsung and other smartphone makers are competitors.
If you are a manager for Samsung, you definitely want to know how and what Apple is doing now and in the near future by reading (and probably analyzing) Apple’s financial statements.
7. Employees (External)
Employees who are not a manager or director work inside the business but they don’t have access to the report generated by the management accounting. So they are categorized as external.
Employees want to know whether or not the employer has the capability of maintaining current employment and delivering the promise it has made; salary increase, bonuses and other benefits.
Although it is not easy to relate the company’s financial situation to a specific career prospect, smart employees can get the sense.
8. Press (External)
Particularly to reporters of a business portal (such as Wall Street Journal, Forbes, and Business Insider), financial statements often become a great yet legitimate source of information. They can’t write “Apple Inc. sold 5 million iPhones 7s and made $1 billion profit” before they actually read Apple’s financial statements.
- Who uses financial accounting information? Everyone in the business does, or at least everyone should.
- The internal report (management report) is generated by the accounting process referred to as “management accounting” and used by the management to make various decision in the planning, executing and evaluating stages.
- The external report (financial statements) is also come from the area of accounting referred to as “financial accounting” and used by external users (investors, creditors, suppliers, customers, government agencies, competitors, employees, and the press.
- A major difference between management and financial accounting is the types of financial reports prepared.
- Internal reports are pretty much customized to meet the needs of management and may vary considerably among businesses.
- General-purpose financial statements and other external reports, however, follow certain standards and are thus more uniform among companies.