Specific financial decisions often depend more on one type of accounting information than another. Consider the following independent, hypothetical situations:
1. Samuel Colt owns a company called Organics To You, which operates a chain of 20 organic food stores across Canada. Samuel wants to determine which brand of pasta is the most profitable for the store.
2. The Backroads Company is considering extending credit to a new customer-Europe Tours Company. 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.
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 behaviour?