Interested parties Revision Notes

Owners and managers rely heavily on accounting information to understand how well the business is performing. Financial statements such as the income statement and balance sheet provide insights into profitability, asset utilisation, and financial position. For example, an owner reviewing the profit and loss account can determine if the business is generating sufficient profit to justify continued investment or expansion.

Managers use detailed accounting reports to make operational decisions, such as budgeting, cost control, and pricing strategies. For instance, if the cost of raw materials rises, managers can analyse cost reports to decide whether to increase product prices or find alternative suppliers. This use of accounting information supports effective planning and control within the business.

• Owners assess profitability and financial health to decide on reinvestment or dividends.
• Managers use accounting data for budgeting, controlling costs, and operational decisions.

Trade creditors supply goods or services on credit and need to evaluate whether the business can pay its debts on time. They examine accounting information such as the current ratio (current assets divided by current liabilities) to assess liquidity. For example, a current ratio above 1 indicates the business has more current assets than current liabilities, suggesting it can meet short-term obligations.

Banks use accounting reports to decide whether to grant loans. They analyse profitability, cash flow statements, and debt levels to assess the risk of lending. A bank may reject a loan application if the business shows consistent losses or poor cash flow, indicating potential repayment difficulties.

• Trade creditors check liquidity ratios to ensure timely payment.
• Banks evaluate profitability, cash flow, and debt before lending.

Investors use accounting information to decide whether to buy, hold, or sell shares in a company. They focus on profitability ratios such as return on capital employed (ROCE) and earnings per share (EPS) to gauge how well the business generates returns.

For example, an investor comparing two companies might choose the one with a higher ROCE, indicating more efficient use of capital. Investors also consider risk factors revealed in financial statements, such as high debt levels, which could affect future dividends or share value.

• Investors assess profitability ratios to evaluate returns.
• They consider financial risks shown in accounting reports.

Members of clubs or societies often rely on accounting information to ensure that funds are managed responsibly and transparently. Financial reports show income from subscriptions and fundraising, as well as expenses for activities and maintenance.

For example, club members reviewing the annual accounts can verify that funds are used appropriately and that there is no misuse. This transparency helps maintain trust and encourages continued support from members.

• Club members use accounts to monitor fund usage and transparency.
• Financial reports help maintain trust within the organisation.

Government agencies and tax authorities use accounting information to ensure businesses comply with laws and pay correct taxes. Financial statements provide evidence of income, expenses, and profits, which form the basis for tax calculations.

For instance, tax authorities may audit a company’s accounts to verify declared profits and detect any discrepancies. Accurate accounting information helps avoid penalties and legal issues, ensuring the business meets its statutory obligations.

• Government bodies use accounting data to enforce legal compliance.
• Tax authorities rely on financial statements to assess tax liabilities.