Specific financial decisions often depend more on one type of accounting information than another.
Consider the following independent, hypothetical situations:
1. Pierson Industries is thinking about extending credit to a new customer. The terms of credit would require the customer to pay within 45 days of receipt of the goods.
2. An investor is considering purchasing a company called Organic Food Solutions Ltd. The investor plans on owning the company for at least five years.
3. The president of Hi-tech Adventure Limited is trying to determine whether the company is generating enough cash to increase the amount of dividends paid to shareholders and still have enough cash to buy additional equipment when needed.
4. Standen Bank is thinking about extending a loan to a small company. The company would be required to make interest payments at the end of each year for five years, and to repay the loan at the end of the fi ft h year.
Instructions
(a) Identify types of user(s) of accounting information in each situation and indicate if they are external or internal.
(b) For each situation, state whether the user making the decision would depend mostly on information about
(1) The business's economic resources and claims to the resources, or (2) the economic performance of the business. Justify your choice.
TAKING IT FURTHER Why is it important to users of financial statements to know that the statements have been prepared by individuals who have high standards of ethical behavior?