Specific financial decisions often depend more on one type of accounting information than another.
Consider the following independent, hypothetical situations:
1. A B.C. investor is considering purchasing a company called Organics To You, which operates a chain of 20organic food stores across Canada. The investor plans on owning the company for a minimum of five years.
2. The Back roads Company is considering extending credit to a new customer. The terms of credit would require the customer to pay within 45 days of receipt of the goods.
3. The senior partner of Accountants R Us is trying to determine if the partnership is generating enough cash to increase the partners' drawings and still ensure the partnership has enough cash to expand its operations.
4. Shields 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 three years, and to repay the loan at the end of the third 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?