Who are the internal and external users of accounting information? b. What is value added statement? Also…

(a) Users of accounting information are classified into two broad groups on the basis of their position relative to the business — internal users, who are within the organization, and external users, who stand outside it.

1. Board of Directors (internal): the top level of management elected at the AGM, needing information to formulate short-run and long-run plans and policies.
2. Managers (internal): they implement the BOD's policies and need information for all managerial functions, to review solvency, judge profitability in terms of turnover and investment, ensure effective utilization of resources and decide future courses of action.
3. Accountant and others (internal): the accountant records and processes all business activities; business consultants and legal advisors also require the information.
4. Investors/shareholders (external): the chief providers of capital, who need to know the return and risk of their investment and whether to buy, hold or sell.
5. Lenders (external): banks, financial institutions and debenture holders, who need to know whether loan and interest can be repaid and on what security and rate.
6. Suppliers and trade creditors (external): who decide whether to supply on credit, for how long, and at what risk of bad debt.
7. Rating agencies and security analysts (external): equity analysts, bond analysts, brokers and credit rating agencies, whose concerns mirror those of investors and lenders.
8. Employees and trade unions (external): who need to know stability and profitability for wage negotiation, bonus declaration and retirement benefits.
9. Customers (external): who need assurance of continued supply, servicing and warranty support.
10. Government, regulatory agencies and tax authorities (external): who regulate activities, assess tax and ensure proper disclosure.
11. The public (external): the local community, consumer groups and environmental activists, concerned with pollution control, product safety, competition and treatment of local suppliers.

(b) A value added statement is a financial statement that shows the wealth (value added) created by an enterprise through its own efforts during a period — sales less the cost of bought-in materials and services — and how that wealth has been distributed among the groups that helped create it.

1. Meaning and computation: value added = sales revenue − cost of bought-in goods and services; it is then applied to employees as wages, to lenders as interest, to government as taxes, to shareholders as dividend, and the balance retained in the business as depreciation and reserves.

2. To show wealth created rather than profit earned: its main objective is to report the total wealth generated by the collective effort of employees, capital providers and management, instead of reporting profit belonging to shareholders alone.

3. To disclose the distribution of wealth among stakeholders: it reveals what share of the created wealth each group — employees, government, lenders, shareholders and the entity itself — has received, thereby serving the objective of accountability to society.

4. To aid productivity measurement and employee relations: ratios such as value added per employee help measure productivity and support wage negotiation, since employees can see the wealth they helped create; it also supports social accounting by extending accountability beyond the traditional financial account of capital to shareholders.