1.

Discuss the users of financial information

Internal Users

“Internal users of accounting information are managers who plan,

organize, and run a business” and include marketing managers and

production supervisors (Weygandt, Kieso, and Kimmel, 2005, p. 5). Managers

must understand financial information to answer such questions as “Is cash

sufficient to pay bills?” and “Which product line is more profitable?”

Accountants provide internal reports to management for comparison and

forecasting needs; such examples include comparisons of operating

alternatives, projections of long-term financial sustainability, and forecasts

for annual cash needs.

External Users

Several types of external users of financial and accounting information

exist and include investors and taxing authorities. “Investors (owners) use

accounting information to make decisions to buy, hold or sell stock” (p. 6),

while suppliers view the financial health of the organization to ensure timely

repayment of credit extended to an organization. Other external users

include equity investors, creditors, employees, customers, governments and

their agencies and regulatory bodies, and the general public.

Equity investors “are interested in the entity’s ability to generate net

cash inflows because their decisions relate to the amounts, timing, and

uncertainties of those cash flows” (FASB, p. 2). The entity investor is

interested in the types of dividends or other cash distributions provided to

investors and how prices of shares or other ownership interests fluctuate

based on a company’s ability to generate net cash inflows.

Creditors include banks and other lending institutions that provide

capital for a company’s operations or to fund projects. Creditors are also

interested in the current and future cash flows of an organization and views

said entity as a “source of cash in the form of interest, repayment of

borrowings, and increases in the prices of debt securities” (p. 2). The firm

must satisfy such research with the ability to earn satisfactory income and

repay debts when said debts come due.

Employees and the organizations that support said employees are

interested in whether the company can pay for the services employees

provide to the company. Stability, profitability, and employer growth are all

key interests of employees and unions as these translate into the ability of

the company to continue to pay wages and provide compensatory benefits,

such as retirement and health benefits.

Customers depend on a company to provide goods and services to

them and are interested in the long-term profitability of the organization.

Corporate longevity is not only the concern of corporate management and

owners but also customers who depend on a product or service from said

company. Dependence of products or services could cause hardship to

consumers, especially business consumers, in providing their products or

services to their core market. “Customers are interested in whether a

company will continue to honor product warranties and support its product

lines” (Weygandt, Kieso, and Kimmel, 2005, p. 7).

Governments and their agencies and regulatory bodies “are interested

in the activities of an entity because they are in various ways responsible for

seeing that economic resources are allocated efficiently” (FASB, p. 3). The

Securities and Exchange Commission and the Federal Trade Commission are

examples of such regulatory agencies, as they need to know whether the

company is operating within the rules dictated by these regulatory agencies.

The IRS is a governmental agency that applies tax rules and guidelines

companies must comply with in preparing financial statements and

preparing tax returns.

The final set of users requiring company financial information is the

general public. The general public is interested on the contributions of

companies on the local economy in the generation of employment

opportunities, payment of taxes, and the provision of charitable

contributions. Members of the public are interested in trend analysis of

financial information and recent news to determine if the company can

continue to contribute to the local economy.

Importance of Financial Information

Companies provide financial information to users in the form of various

financial statements, press releases, and other pertinent data. Such data is

used by various users to determine creditworthiness, continued operations,

and adherence to regulatory standards. Companies certainly benefit from

the users of financial information and the accountant must ensure timely and

transparent information to these users. Without such financial information,

users of financial information could not provide companies with needed

financial capital and could not depend on corporate forecasts and outlooks.

2. What is a business organization? Explain the forms of business

organization

Business Organization

Structure of a particular business in terms of how it functions. Its purpose

is central to its structure.

COMMON FORMS OF BUSINESS

ORGANIZATION

SOLE PROPRIETORSHIPS
A sole proprietorship is a business owned and managed by one individual. A
sole proprietorship is not a legal entity. It refers to an individual who owns
the business and is personally responsible for its debts. Owners may freely
commingle business and personal assets. Owners cannot raise capital by
selling and interest in the business. The owner reports all income and
expenses on the owner’s personal tax return. The business terminates on the
owner’s death or withdrawal. However, an owner can sell the business, but
can no longer remain the proprietor.

GENERAL PARTNERSHIPS
A general partnership is a business organization formed when 2 or more
individuals or entities form a business for profit. All partners share in the
management and in the profits and decide on matters of ordinary business
operations by majority of the partners or by percentage ownership of each
partner. Each partner is liable for all business debts and bears responsibility
for the actions of the other partners. Each partner reports partnership
income on their individual tax return. A partnership dissolves on the death or
withdrawal of a partner unless the partnership agreement provides
otherwise. Partnerships are relatively easy and inexpensive to form and
require few ongoing formalities.

LIMITED LIABILITY COMPANY

A limited liability company is a new and flexible business organization of one
or more owners that offers the advantages of liability protection with the
simplicity of a partnership, i.e. partners are not liable for business debts.
Each partner reports business income on their individual tax return. LLCs
may dissolve on the death or withdrawal of an owner depending on state
law. An LLC is not appropriate for businesses seeking to become public or
raise capital. LLCs require few ongoing formalities but usually require
periodic filings with the state and also require annual fees. LLCs are more
expensive to form than partnerships.

CORPORATIONS
A corporation is a legal entity that has most of the rights and duties of a
natural person but with perpetual life and limited liability. Shareholders of a
corporation appoint a board of directors and the board of directors appoints
the officers for the corporation, who have the authority to manage the day-
to-day operations of the corporation. Share holders are generally liable for
the amount of their investment in corporate stock. A corporation pays its
own taxes and shareholders pay tax on their dividends. However, in a
subchapter S corporation, shareholders report their share of corporate profit
or loss in their individual tax return. The corporation is its own legal entity
and can survive the death of owners, partners and shareholders. A
corporation is the best entity for eventual public companies. Corporations
can raise capital through the sale of securities and can transfer ownership
through the transfer of securities. Corporations require annual meetings and
require owners and directors to observe certain formalities. Corporations are
more expensive to form than partnerships and sole proprietorships.
Corporations require periodic filings with the state and also require annual
fees.

There are many tyoes of Business Activities, which include:

• Local businesses
• National businesses
• International businesses
• Public businesses
• Private businesses
• Not for profit businesses

Branches of accounting:
In order to meet the ever increasing demands made on accounting by different interested parties
the various branches of accounting have come into existence.
Financial Accounting:
The main purpose of financial accounting is to ascertain the true result of the business operations
during a particular period of time and to state the financial position of the business on a
particular point of time. Financial accounting produces general purpose reports for use by the
great variety of people who are interested in the organization but who are not actively engaged in
its day-to-day operation. Financial accounting is the oldest and the other branches have
developed from it. The objects of financial accounting can only be achieved by recording
business transactions in a systematic manner according to a set of principals.
Cost Accounting:
The main object of cost accounting is to determine the cost of goods manufactured or produced
by the business. It also helps the management of the business in controlling the costs by
indicating avoidable losses and wastes.
Managerial Accounting:
The object of this accounting is to communicate the relevant information periodically to the
management of the business to enable it to take suitable decisions.