Using an organisation of your choice that is listed on the stock exchange, discuss how the financial information meets the needs of five different non-management external users.
Include in this discussion the qualitative characteristics that make information useful to users of these financial reports. Are there any weaknesses in the provision of information to these users?
Overview of Accounting and Finance in Business Organizations
Among all the different activities of the business organization, accounting and finance is considered as the backbone for achieving the organizational objectives and goals. In the process of accounting and finance, financial information is considered as an integral part for the financial success of the companies. Different kind of financial information of the companies include credit information, information about different financial accounts, loan information, taxation information and many others (Amiram 2012). All these information has a vital part to play in the decision making process of the people related with the business organizations. In this context, it needs to be mentioned that there are two types of users of these financial information; they are internal management users and external non-management users. The main aim of this report is to analyze and evaluate the aspect that whether the provided financial information of the business organizations meet the need of five different non-management external users (Theriou 2015). It is required for this report to consider a London Stock Exchange listed company of United Kingdom (UK). Thus, Sainsbury’s PLC is taken for this report. Sainsbury’s is the second largest retail chain having business operation all over UK. The company was founded in the year of 1869 and is headquartered at London, UK. The main products of the company involve convenience store, supermarket chain, hypermarket and others (About.sainsburys.co.uk 2018). This particular report involves in the analysis of various financial statements of the company for the year 2017 in order to achieve its main objective.
The above part of the report has mentioned about the existence of two types of users of financial information; they are internal management users and external non-management users. This study involves in the analysis and evaluation of non-management external users of financial information of Sainsbury’s. Non-management external users refer to the entities or individuals non involved in the management of the business organizations but are interested in acquiring the financial information of the companies for different purposes other than management decision-making. There are different types of non-management external users of financial information for the companies. In case of Sainsbury’s, five types of non-management external users of financial information are Investors, Trade Creditors or Suppliers, Bank and Other Lenders, Tax Authorities and Regulatory Agencies, and Employees and Labor Unions (Arnold et al. 2012). The following discussion shows how the provided financial information of Sainsbury’s meets the needs of the above-mentioned external users.
Non-Management External Users of Financial Information for Sainsbury's PLC
Investors: Investors refer to the persons or business organizations who commit capital in the businesses in order to get good financial returns and for this reasons, investors are considered as one of the major non-management external users of financial information (Hull 2012). It needs to be mentioned that the area of interest of the investors is the past performance of the business organizations and the potential of the business for future earnings. For this particular reason, it is required for the business organizations to supersize the historical financial information on their business performance as it is vital for the investors to assess the profitability of their businesses. Based on this information, the investors decide whether to hold the investors or to sell it. In case of Sainsbury’s, it can be seen that the company provides all the financial statements of their companies for last five years in their official website from where the investors can access all the required financial information of the company’s performance. Apart from this, Sainsbury’s always provide five-year financial record in the annual report of each year (Gennaioli, Martin and Rossi 2014). The following table shows the five-year financial record published in 2017 Annual Report of Sainsbury’s:
(Source: about.sainsburys.co.uk 2018)
All the provided information by Sainsbury’s is helpful for the investors of the company to assess the financial health of the company. Thus, it can be seen that the provided financial information by Sainsbury’s has been able to fulfill the basic information need of the investors.
Trade Creditors or Suppliers: Trade creditors and suppliers refer to the persons or institutions who provides business goods on the credit basis. Thus, it can be said that the creditors or suppliers provide goods in credit basis. In this context, it needs to be mentioned that before the process of credit extension, creditors assess the ability of the business to pay (Mathuva 2015). For this reason, they require the liquidity related financial information of the companies for assessing the ability of the companies to pay the short-term business organization. Apart from this, the profitability and cash flow of the companies is also assessed. Based on this assessed information, they take decisions on credit period, credit amount, credit policies; most importantly whether credit needs to be allowed or not. In case of Sainsbury’s, it can be observed that the company uses to publish the income statement and statement of cash flows from where the creditors can get profitability and cash flow related information (Carbó?Valverde, Rodríguez?Fernández and Udell 2016). Apart from this, Sainsbury’s also provides information related to their current assets and liabilities from where the creditors can assess the liquidity position. In order to provide more assistance, Sainsbury’s publishes some major financial ratios so that the creditors can assess the financial position.
Meeting the Needs of Non-Management External Users
(Source: about.sainsburys.co.uk 2018)
Bank and Other Lenders: Bank and other lenders refer to the financial institutions providing necessary capital to the companies for particular rate of interest. All the provided debts and loans by the creditors and lenders are considered as the long-term debts or loans (Giannetti and Ongena 2012). For this reason, they use to assess the ability of the companies to pay the long-term debts. In this process, they required particular financial information to assess the cash flow and profitability of the company. They also assess the long-term borrowing of the company. It needs to be mentioned that Sainsbury’s provides all the required financial information of long-term borrowings in their consolidated balance sheet.
(Source: about.sainsburys.co.uk 2018)
Apart from this, Sainsbury’s use to publish their income statement and statement of cash flows on yearly basis along with the necessary notes to these financial statements. From these statements, the banks and other lenders obtain essential information related to the profitability and cash flow position of the company (Brigham and Ehrhardt 2013). Thus, it can be seen that Sainsbury’s use to provide all the necessary information to the banks and other lenders.
Tax Authorities and Regulatory Agencies: For the business operations of the companies, tax authority and other regulatory authorities are considered as major non-management external users of financial information. Tax authorities require different types of financial information of the companies related to the earnings and profitability for the determination of taxes on the business operations (Hanlon, Hoopes and Shroff 2014). It is the responsibility of the business organizations to pay taxes as per the pre-determined taxation rate. At the same time, various regulatory agencies required specific financial information of the companies in order to determine whether the companies are complying with the corporate laws and regulations or not. In case of Sainsbury’s, it can be observed that the company uses to publish all the required information related to taxation in their annual report. For example, it can be mentioned that Sainsbury’s has provided all the taxation related information in Notes 7 in the annual report of 2017. Apart from this, Sainsbury’s uses to provide information related with the basis of preparation of their different financial statements along with the significant accounting estimates, judgments and assumptions (Gitman, Juchau and Flanagan 2015). From all of these financial statements and notes, the respective tax and regulatory authorities can get their required financial information.
Qualitative Characteristics of Financial Information
Employees and Labor Unions: Employees are considered as an important part of the companies achieving the organizational goals and objectives. At the same time, it is the responsibility of the business organizations to pay all the necessary remuneration and benefits of the employees (Benmelech, Bergman and Enriquez 2012). For this reason, it is required for the employees to obtain necessary financial information related to the performance of the companies. Thus, the employee and labor unions review the financial condition and performance of the companies for demining the increase in salary, remuneration and other benefits. Thus, they can get the required financial information from different financial statements of the companies. It can be observed that Sainsbury’s use to publish their income statement from where these labor unions can get the profitability related to the organization (Bova 2013). Apart from this, from the consolidated balance sheet of Sainsbury’s, they can assess the asset and liability positing. Thus, it can be said that Sainsbury’s provides all the necessary financial information to the employee and labor unions with the help of their different financial statements.
The above discussion shows how Sainsbury’s meets the financial information need of the specified five types of non-management external users. Now, it needs to be mentioned that the financial information of the companies has some major qualitative characteristics making the information purposeful for the users. They are divided into two parts; fundamental qualitative characteristics and enhancing qualitative characteristics. The following discussion discusses about these qualitative characteristics:
Relevance: The acquired financial information by the external users is required to be relevant with the decision-making process of them as relevant financial information has the ability to make difference in the decision-making process. Thus, the financial information must contain both predictive and confirmatory values. Moreover, both these values are interrelated. In case of Sainsbury’s, it can be observed that the provided financial information by the company assists different external users for their different purposes. Moreover, the financial information of Sainsbury’s has material effect on the financial position of the company (Nobes and Stadler 2015).
Faithful Representation: The financial statements of the companies are full of economic phenomena in words and numbers. In order to be purposeful to the external users, the financial information is required to be relevant and it must be presented in the most faithful manner in order to represent its purposes. Completeness, neutrality and freedom of financial information increase in the presence of faithful representation (Gebhardt, Mora and Wagenhofer 2014). It needs to be mentioned that Sainsbury’s has presented all of their financial information by complying with the required accounting policies, regulations and company laws. All these aspects promote faithful representation of the financial information.
Comparability: Information of the business organizations becomes purposeful when it can be compared to the similar information of other entities or the same company for other periods. In the presence of comparability characteristic, the external users can identify and understand the similarities and differences between this financial information (Yip and Young 2012). In case of Sainsbury’s, it can be seen that the financial information of this company can be easily compared to another period or the other companies.
Verifiability: In the presence of verifiability, the external users of financial information can assure that the financial information is presented faithfully to represent its economic phenomena. At the same time, in the presence of verifiability, different observers can reach to logical consensus about the aspect of faithful representation (Tasios and Bekiaris 2012). From the annual report of Sainsbury’s, it can be observed that the company has provided different kinds of financial notes to the financial statements that establish the verifiability aspect of financial information.
Timeliness: External users of financial information need the required financial information at the time of decision-making. Thus, timeliness characteristic states that financial information needs to be available to the users at the time of decision-making so that they can influence their decisions (Kargin 2013). It can be observed that Sainsbury’s use to publish their financial statements at a particular time of the year so that all the uses can use them at the time of decision-making. Apart from this, Sainsbury’s also publishes quarterly interim financial reports at the particular time of the year in order to provide more support in their decision-making process.
Understandability: Understandability of the financial information can be established by classifying, characterizing and presenting the financial information in a clear and concise manner (Gebhardt, Mora and Wagenhofer 2014). For this reason, financial statements must be prepared in simple form. In case of Sainsbury’s, it can be observed that the company uses to prepare their financial statements in user-friendly manner so that the users can easily access information from them for the purpose of analysis and evaluation.
From the analysis of the annual report of Sainsbury’s, it can be observed that the company uses to provide all kind of financial information with the help of different financial statements like income statement, consolidated balance sheet, statement of cash flow, statement of change in equity and statement of cash flow (Togashi et al. 2014). In this context, provision of information refers to the process within which financial information is provided to the non-management external users. In case of Sainsbury’s, it can be observed that the main provision of information of this company is the publication of financial statements of the company. Sainsbury’s publishes their financial statements along with their annual report. Apart from this, the company uses to publish their interim financial report on quarterly basis. These are the main provisions for financial information in Sainsbury’s. Moreover, the company also arranges different meetings in order to announce the good performance of their business. In addition, external users can use the official website of Sainsbury’s to access the required financial information (Godoy et al. 2012). Thus, from the above discussion, it can be seen Sainsbury’s has established some effective means for provision of information for the external users and all these provisions are effective to provide financial information to the external users. Hence, it can be said that there is not any weakness in the provision of information for Sainsbury’s to the external users.
From the above discussion, it can be observed that the business organizations are required to provide the external users with necessary financial information for the purpose of different decision-making. The above discussion states that there are five major non-management external users of financial information; they are Investors, Trade Creditors or Suppliers, Bank and Other Lenders, Tax Authorities and Regulatory Agencies, and Employees and Labor Unions. All these non-management external users of financial information require different and in some cases, similar types of financial information for different purposes like investment decision-making, credit decision-making, decision related to the increase in salary, determination of taxation expenses and others. From the above discussion, it can also be seen that the financial information needs to possess some qualitative characteristics in order to be useful to the external users for various purposes. The fundamental qualitative characteristics are relevance and faithful representation; the enhancing qualitative characteristics are verifiability, comparability, timeliness and understandability. Lastly, it can be observed that Sainsbury’s has established effective provisions for financial information to their external users like publication of annual report, interim financial report and others. For this reason, there is not much weaknesses in the process of provision of information in Sainsbury’s.
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