 Hello, in this presentation we will discuss the discussion question of who are users of financial statements and what do they want. This is going to be a type of essay question that's asked on many accounting tests and it's something that's going to be useful in real life as well because we want to know who those end users are of the financial statements, knowing who they are and what they want will help us produce a better product, produce better financial statements. When considering a question such as this on a test basis, note that we're usually going to be breaking out the financial, the accounting into two main categories. So usually they're going to be breaking out financial accounting and managerial accounting and really focusing in on the difference between those two, between the financial accounting and managerial accounting. Now is there overlap in real life between those two things? There will be, we're going to be using on some of the same data when we're considering financial accounting and managerial accounting, but we're really looking at different goals, looking at different end users when comparing those two concepts. For example, the financial accounting we're usually geared towards external users, we're geared towards the creation of the financial statements for those external users and when we think of managerial accounting, we're thinking about internal users, management typically and we're looking to put financial information and possibly other information together for decision-making from an internal standpoint from a management standpoint. Now you might be asking, and this was always a question of mine when we're going over these topics, as a small business person or someone geared towards a small business, it's typically the case where we're looking at the financial statements in order to help with internal decision-making processes and managerial accounting, the management of course will want the same financial data starting with the same information we're looking at in the financial statements in order to make internal decisions. So the question then is what's the difference between financial accounting and managerial accounting or why is it that the financial accounting is geared towards external users as opposed to geared towards internal users? And part of the answer to that is that the financial statements themselves need to be standardized if given to external users, which they will be especially for publicly traded companies, which is required to because we have investors in that case. But any external user for if we're going to give the financial statements to the bank for a creditor in order to get a loan or if we need to do our taxes of course, we have those external users. And the point of the external users is that they're more dependent on the information, meaning they don't have as much intimate knowledge of the business or the workings of the business and therefore they're more reliant than just on the numbers on the financial statements. And that's why the financial accounting is really geared towards really standardizing those numbers and having the process to be standardized so that those external users can look at what they're seeing here and not need any special information or any special knowledge and not need to know really how is it that this particular company puts this together as opposed to this other particular company, they want to be able to look at those financial statements and be able to compare them. So when we're considering the end result in terms of financial accounting, who's going to use the financial statement, who's going to be looking at the balance sheet to the income statement, the statement of equity, we're really geared towards those external users. Typically, you can think of the investors for looking at investors who want to invest money into the financial statements. The question is, are these financial statements relevant to that decision-making process? What do these external users want? If we were the investors in a company, what would we want to see from the company? And we would want to see the position of the company, how is the company doing financially in terms of this point in time, the balance sheet, and how have they done over time? What's their performance been in the last month, the last year, the income statement? And those are going to be typically what we're going to use in order to say, are they stable? Can we put the money here? Are they going to generate revenue in the future and therefore provide us with a return on the investment? To make those decisions, also we want to compare the financial statements to prior periods, and we want to be able to compare the financial statements to other companies. And we want to be able to do that fairly easily. If I have two companies we're thinking about investing in, we want to be able to take those financial statements, line them up, see what the differences are, be able to compare them as best as possible, and make a decision as to which which company we want to put our money into. The standardization really helps with that. So that's why the financial accounting is going to be much more regulated in terms of processing these financial statements for external users. The value to the economy of having standardization and some faith in that standardization in the format that these financial statements are created creates a lot of value within the economy, providing transparency, providing other users of financial statements, including investors, to be able to compare these financial statements, compare like to like, compare apples to apples, as they say, and then make relevant decisions without having to really know the intricacies per se of every detail of the company in terms of how do they particularly record some items versus another item. Those type of timing differences, types of estimate differences, those types of things can really make a difference in terms of the reporting. And we want the information out there as much as possible so that decision makers in terms of investors, in terms of creditors, can make as quick a decision as possible to have as much information as they need as possible in order to make the best decisions they can make. That's the type of thing that'll keep the economy moving. On the internal user side, note that we're talking management will typically be starting with that financial statement to data as well. They want to know the financial data. They want to know basically where we stand, what's the balance sheet, and what's going to be the income statement. But note that the internal users are not quite as many regulations, meaning the internal reports we can use for management don't have to go through the same regulatory process as the financial statements that will be then presented to external users. So the internal reports, possibly management wants to see that big picture view that we have for the financial statements, meaning how is the company doing as a whole? How is the entire company moving forward? What's the profitability look like in terms of the entire company? But management also probably wants to break those numbers down into separate components by department and be able to look and see how individual departments are doing. So although management will start with that same data, small companies will typically be looking at that same data. How are we doing overall? What's our performance been? What's on the balance sheet? But we also want to break that down to components. How has this particular department been doing? How have we been doing in this particular area? How can we change these numbers around to see how we've been doing in these different components? And those types of things are really geared towards best practices and not so much regulatory policies driving it, managerial accounting being geared towards how can we manipulate this data to make good decisions? So on the internal accounting side, on managerial accounting side, we will start there will be overlap in that we're going to use a lot of that financial statement data. But the financial statement creations themselves have to be geared towards those external users. And in so doing, it's going to be very much more standardized to do so. Managerial accounting is going to start with a lot of that data, but it's going to be able to have the flexibility to manipulate that data to whatever, you know, the management wants within the internal side, within the decision making side, typically breaking things down to smaller components. So when asked this question, who are the users of financial statements? That piece, typically, if it's in a multiple choice question, or even if it's in an essay question, it's typically going to say you want the financial statements are usually geared towards external users, meaning financial accounting, the creation of the financial statements are usually geared towards external users. And what do they want? They want to these are people like creditors. These are people like the bank. These are people like investors. They want to see that big picture. They want to see how things are doing as a whole. They want to know whether or not they should invest, whether or not they should give financing to the business in terms of a loan. How are they going to make those decisions? They want to rely on the financial statements. They want them to be relevant. They want to be able to compare those financial statements. Those are going to be the things we're looking for when we're on the internal side of making the financial statements. Sometimes those goals can get kind of lost because we're doing our own little piece of things. And we're just trying to try to put this one thing together. And it's good to have that big picture view of what's what's going on in total. So that's that's what the financial statements are geared towards those external users. What do they want? They want something that is relevant, reliable, comparable, something that they can use to make decisions. You can say that that internal users and management will use that same financial data. But make sure that if if we're looking at a question that says what is who's financial accounting geared toward internal users or external users, just make sure that you're keeping in mind that the financial statements, the regulatory system generally accepted accounting principles, those are typically geared towards external users. They are best practices. They're best practices for for managerial decision making processes as well. They're best practices typically to just know how a company is doing and to make the financial statements as relevant as possible on a big, big picture format. But they're geared towards those external users, those users who are dependent on those numbers and don't have intimate knowledge of the company. Managerial accounting internal users then may start with that same data but are not required to have that that same kind of reporting requirements. They can manipulate the numbers in any way they want in other words in order to to make the best decisions from an internal managerial standpoint.