9706 · 1.6.1
Users of accounting information flashcards
Revision flashcards for Cambridge 9706 Users of accounting information (syllabus 1.6.1). Flip, recall, then mark a real past-paper question.
Card
Investors need?
Profitability, dividends, growth — ROCE, EPS, share price context.
Card
Lenders need?
Liquidity, gearing, cash flow — can interest/principal be paid?
Card
Managers need?
Detailed cost/revenue, budgets, variance — internal reports.
Card
Government/tax?
Taxable profit, compliance with regulations.
Card
Relevance?
Information affects decisions — predictive or confirmatory value.
Card
Faithful representation?
Complete, neutral, free from error.
Card
What is the primary need of a lender (e.g., a bank) when analysing a company's financial statements?
To assess the company's liquidity and solvency. They need to be confident that the business can meet its interest payments and repay the principal loan amount when it falls due.
Card
Define 'Faithful Representation' as a fundamental qualitative characteristic.
Information must faithfully represent the economic phenomena it purports to represent. This means it must be complete (all necessary information is included), neutral (without bias), and free from material error.
Card
Differentiate between an internal and an external user of accounting information.
Internal users are within the business (e.g., managers) and use detailed, often forward-looking information for planning and control. External users are outside the business (e.g., investors) and rely on published, historical financial statements for evaluation.
Card
Why is the 'Comparability' characteristic important for an investor?
It allows the investor to compare the company's financial performance over different time periods (trend analysis) and against other companies in the same industry. This helps in making informed investment decisions about where to place their capital.
Card
What is the role of the government (e.g., HMRC in the UK) as a user of accounting information?
The government uses financial information to ensure the business is complying with regulations and to calculate and collect the correct amount of tax payable, such as Corporation Tax on profits and Value Added Tax (VAT) on sales.
Card
What is 'Stewardship' in the context of accounting?
Stewardship refers to the responsibility of management to take care of and properly manage the resources (assets) entrusted to them by the owners (shareholders). Financial statements help owners assess how well management has fulfilled this duty.
Card
Define the enhancing characteristic 'Verifiability'.
Verifiability means that different knowledgeable and independent observers could reach a consensus that a particular depiction is a faithful representation. For example, verifying the cost of an asset by referring to an invoice.
Card
What is the importance of 'Timeliness' in financial reporting?
Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Older information is less useful. For example, a 2023 annual report is more useful in early 2024 than in late 2025.
Card
Explain the 'Understandability' characteristic.
Information should be presented in a clear and concise way so that users with a reasonable knowledge of business and economic activities can understand it. Complex information should not be omitted, but it should be explained clearly.