CHAPTER 3 — USERS OF ACCOUNTING INFORMATION Rags to Riches + SM might just be the most recognizable two-letter combination here in the Philippines. If you think about it, it is amazing how these two letters tell a rich history. SM is an avenue for almost anything you desire to do. From family gatherings, meetings with friends, or simply enjoying some alone time for yourself, SM truly “got it all for you” SM is no exception to the struggles faced by all start-up businesses. SM was founded as a shoe store by Henry Sy, Sr. in October 1958 in downtown Manila. During those times, the company catered to a relatively small customer base. Mr. Sy thought of establishing a shoe store with a store layout and merchandising concepts never before seen in the Philippines. The popular shoebox structure of its malls became the trademark of SM. From its humble beginnings in Manila, SM is currently a retail giant. The success and expansion of SM are partnered with a growing customer base. Additionally, investors are more interested in investing in the company to share in its success. Creditors are now more willing to lend to the company since they are assured that it has the capability to pay. Being a large player in the economy, SM is also closely watched by government agencies. In the past, SM need not produce financial reports to cater to the information needs of interested parties. Nowadays, it is beneficial for both the company and outside parties if SM provides such information needs. In this chapter, we will discuss the different users of accounting data. As you will know, reports are not only for interested outside parties but for internal parties as well. At the end of this chapter, the students should be able to: ony 1. define external users of accounting data and give examples; 2. define internal users of. accounting data and give examples; 3. _ identify the type and decisions made by each group of users; 4. describe the type of information needed by each group of users; 5. solve exercises and problems on the identification of users of information, types of decision to be made, and type of information needed by the users; and 6. cite users of financial information and identify whether they are external or internal users,Introduction tomers, investors, 4 To be successful, businesses must interact with countless CTT t's transact creditors, and other groups. There is no known business that is establis! eee funds that are ARN Tlf, These outside parties are the main sources of income andl aaportance of key factors in determining if a business will be profitable or not. Given t tinue to capture building lasting relationships with these groups, how can a business con' the interest of such groups? The communication of accounting information is one answer to this propio OY communicating the accounting information to these different parties, they ar ten to make better economic decisions. Financial teports supply the information UES tt demand in order for them to make decisions connected to the business. Howevel, | © common misconception that the users of accounting information include, onl ee ata: parties. This is clearly not the case. Employees of the company, especially Managers use accounting information to make well-informed business decisions. After all, the success, of a business is also heavily dependent on the people running it. As mentioned in the previous chapters, companies typically produce two types of financial statements (ie., general purpose financial statements and special purpose financial statements). General purpose financia’statements are intended to provide information to those who do not have the capability To request directly from the company. Some examples of such groups are the customers, creditors, potential investors, and government agencies, Imagine the workload if all of these groups can just demand financial reports at will. Clearly, it is not wise for a company to produce financial reports that cater to each specific need of these user groups. This is why general purpose financial statements should contain information that can possibly answer the inquiries of a wide range of interested users. On the other hand, special purpose financial Ytatements are usually produced based ‘on the requests of parties that have the capability to ask for accounting information directly from the company. Some examples of such groups are the board of directors, managers, employees, and the stockholders or owners (existing investors). This distinction resulted in the broad groups of users of financial information: external users and internal users. In the following sections, we will discuss and differentiate these two broad groups. We will also give some examples of the people belonging in each group. External Users Customers ‘As much as human beings need oxygen to live, a business needs customers to survive. Customers are the main source of income of businesses. It can even be claimed that most businesses are established solely for the service of their customers. Businesses usual aim to widen their reach by targeting multiple customers segments. All of us have beet Customer at some point in our lives. When you buy shampoo in the Nearby sari-sari ste 7 you are considered a customer. When you have your hair cut by the local barber, nae considered a customer. When your household avail the services of Maynilad or M : ico, rai are considered a customer. It is important to point out, however, that busines even large busi can be customers, For example, most restaurants do not raise livestock for thelr een wwe ‘use,Instead, they purchase chicken, beef, suppliers. In this sense, these busines: are people or entities that acquire g Pork, and other livestock SES are customers thems, }00ds and services for a fee. Customers are one user group that is Particularly interested in the accounting information of a business. By analyzing the accounting information of a business, customers can determine if it will be profitable for them to transact with the business. This is especially essential if the customer plans to build a long-term felationship with the business. Let us go Products from their trusted elves. Simply put, customers iable, restaurants will Probably not ask for its services. Financial reports also hint at the quality of Products and services the business offers. If a company is continuously showing losses in its financial statements, it might indicate that the products and services provided by the company are not of high quality. Customers will most likely veer away from this company. Another thing customers look for in the company’s financial report is its capabilities to honor obligations (e.g., warranties and after- sales services). Normally, customers note the income of a company. The income is a good indicator of the profitability of a company. A profitable result of operations is a signal that the customers will take minimal risk if they decide to deal with the company. Occasionally, customers. also try to know the future commitments of the company (eg., plans for expansion of the business or to discontinue a business segment) since it will affect their | long-term plans as well. Illustrative example: Patricia plans to organize a furniture shop. She wants her business to take off by building the furniture from scratch. However, the materials needed to build the furniture will be purchased from an outside supplier. Patricia has two possible suppliers: Dayana Company and Dray Company. For the last 5 years, Dayana Co. and Dray Co. displayed positive income in their financial statements with Dray Co. having a slightly higher income on the average than Dayana Co‘s. Both companies are regarded as reliable suppliers. But during the last year, Dray Co. experienced problems in its operations due to a labor strike Preventing it from fulfilling all orders. What company should Patricia choose as her supplier? Based on the facts given, Patricia should choose Dayana Co. as her supplier. Even though Dray Cos income is slightly higher on the average than Dayana Co’s, the reliability of Dayana Co. is the more important factor to consider. Since the operation of Dayana Co. is stable, it will likely be the more stable supplier. Creditors Most large businesses (sometimes, even small businesses) require additional funds to rate the business, In the early phase of a business, the contribution of the owners or Investors is the fuel that drives the;company forward. When the fuel runs out, the business Must find a new source of funds. Possible sources of additional funds are the creditors. Creditors lend their fesources (usually money) to the business in exchange for a fee. The fee ‘harged by creditors is the payment for the use of their resources. As you probably learn ' economics, Money loses its value over time. The value of P'1 000 today is not equal to the value of 1 000 one year from now. This is the main reason why creditors ask for a fee, Usually in the form of interest, when you use their money. Common examples of creditors are banks, lending institutions, wealthy individuals, and even the government. Ope iBefore creditors grant loans to a business, they first examine its financial statement, The biggest fear of creditors is that they will not get paid the amount due to them, jy, matter how high the interest rates creditors charge, it will not matter if they cannot claim j in the end. This is the main reason why creditors take a close look in a company’s financig statements. If a company exhibits stable income and consistent desirable results, Creditor, are inclined to lend. Meanwhile, if a company is in dire financial conditions, creditors wi think twice before lending. Generally, creditors would not lend to a risky company. Howeve, there are creditors who still offer their money to these companies in exchange for highe, interest rates or lending fees. As a rule of thumb in the field of finance, “high risk, high retur; Similar to customers, creditors ordinarily observe the profits of a company. Creditor, are concerned with the profits of the company because the profits will be the funds availabl. to repay them. If a company’s profits are consistently high, creditors wilf feel more secure that the company will not default on its debts. Aside from the level of profits, creditors also look at the amount of borrowings the company has. Having high profits is not much oj an upside if the company still has huge amounts of debts. For example, if the profits ofa company for 2014 totaled P2M and its demandable debt amounts to P3M, there is still 2 chance that a creditor will not get paid. Three main factors considered by creditors before lending to a company: 1. Riskiness of lending 2. Profitability of the company 3. | Company's amount of borrowings Illustrative example: Amadeo Co., a textile manufacture, submitted a proposal to Philippine Rural Bank (PRB) which states that the company plans to borrow P5M payable 2 years from now. Amadeo Co. also promises to pay interest of 150 000 every six months PRB examined Amadeo Co‘s financial statements. Based on the bank's analysis, they formed the following conclusions: 1. The profit of Amadeo Co. grew by an average of 10% each year for the past 3 years. 2. Amadeo Co. only has a small amount of borrowings. 3. Amadeo Co. never defaulted on its borrowings in the past. Assuming no other use for its excess funds, should PRB lend Money to Amadeo Co.? Tht answer is yes. The conclusions showed that lending to Amadeo Co. is not a risky endeavor. Potential Investors In some ways, potential investors are comparable to creditors, Continuing the analog) in the last section, investors may also provide the adqjitional fuel to drive the compan) forward. Investors put their resources (usually money) in a business hoping to earna decen amount of return. Unlike creditors who are assured to earn the interest and fees, investor: may win or lose in their investment. Investing in a business is a gamble, To compensate investors for the risks they take, they normally could earn more profit: than creditors, Creditors earn fixed amount of profits in the resources they lend (ie, interes!receive. If the company you invest in is doing well, expect a large amount of profit. if the company you invest in incurs a loss, you might even lose everything you invested, Everyone can be an investor as long as you have enough resources to place in the company’s stewardship. Investors are mostly wealthy individuals, but businesses can invest in other businesses as well. Financial statements provide potential investors the necessary information to decide if they will invest in the business. Investors are even more afraid than creditors of the possibility that they will lose their money. In the event that a company becomes insolvent (ie, assets are less than the liabilities), creditors are paid first before the investors. Through the company’s financial statements, investors try to estimate the risk associated with investing in the company. Moreover, investors seek companies that can give them a decent return in their investments. This does not mean that investors invest only in non-risky companies. There are individuals who invest in companies that are risky. An example of such company is a start- up company. If their gamble is successful, individuals who invest in such companies will earn higher rates of return. The level of profits presented in the financial statements is a primary concern for investors. This information is a key indicator if an investment will be profitable. Investors also evaluate the company’s financial ratios (you will learn these ratios in finance or higher accounting subjects) to get a feel of how the company operates. Investors look out for the earnings retention policy of a company as well. Illustrative example: Aryana is a successful career woman. During her 15-year tenure as an engineer, she amassed a total of 10M in savings. Instead of placing her money in the bank, which earns only 2% in interest every year, she plans to invest in either Shell or Petron. Shell and Petron are two of the largest oil companies in the country. After ‘analyzing the financial statements of both companies, Aryana noted that Petron and Shell earned high levels of profit for the past 2 years with Petron garnering P40M more in profits. In addition, Petron is planning to expand the business which is expected to bring in more profits for the company. Based on the facts given, it is more probable that an investment in Petron will be the more profitable investment in the long run. As illustrated in this example, both the company and the investor will benefit from the communication of accounting information. Investors can make better informed decisions while companies can attract potential investors to Provide additional funds. Government The government is likewise a user of a company’s financial statements. Does the 9overnment plan to invest or lend money to businesses? It is a possibility, but the main Purpose of the government is to regulate the businesses in the economy. Our economy Consists of thousands of businesses interacting with one another. Government's main Tole is to scrutinize businesses, especially the large ones. Different government agencies ae assigned to check if businesses follow guidelines provided by law in their operations. emment agencies also see if businesses are not trying to deceive the other users of nancial statements by misrepresenting the amount of earnings or manipulating portions the company’s financial statements. Redulating businesses is a crucial role to preventher countries as well) “like what happened in the United States (and in ot during the Enron bankruptcy The government, particularly the taxing authorities, also uses the financial statements, to compute for the amount of taxes payable by a company. Companies’ desire to pay lower taxes might encourage ther to understate revenues and overstate expenses to the detriment of the public. Taxing authorities guarantee that this wrongdoing does not occur, The government particularly looks at the income, revenues, and expenses of a company, Officials want to ensure that companies do not overstate their income to attract more investors and creditors. Investing huge amounts of money in a company with lower than perceived value can be very harmful for the economy. Revenues and expenses are closely scanned for taxing purposes. Mustrative example: The Bureau of Internal Revenue (BIR) is responsible for the assessment and collection of taxes from its constituents. As you probably heard in the news, BIR is strengthening its collection policies to provide more funds for the government to use. In the BIR, tax assessors and tax collectors study the financial statements of the companies and compare them with filed tax returns. If the tax returns do not match to the results of the financial statements, the BIR computes for the appropriate taxes to be collected, Academe Members of the academe (e.g., professors, researchers, students) benefit from the accounting information in the financial statements of a company. Although they do not usually transact with businesses, members of the academe utilize financial statements for academic purposes. Use of financial statements for academic purposes is not confined in the accountancy field. Other fields of study like banking and finance, entrepreneurship, and economics similarly make use of financial statements. As early as Chapter 1, it is already stated that the financial statements tell a story about the operations of a company. Professors and students take advantage of this fact. For example, if a class plans to study the footwear industry, they might want to look at the financial statements of footwear companies like Adidas and Nike. By doing so, professors and students might get an idea on how the industry operates. Financial statements also serve as a blueprint to help students in understanding the field of accountancy. Most textbooks contain samples of financial statements. A student of accountancy is exposed to numerous financial statements of companies belonging from different industries, Alternatively, researchers study the financial statements to identify particular trends in a specific industry or the economy as a whole. The result of the studies conducted by researchers can greatly help the government in assessing the condition of Researchers may also aim to improve the accountancy Practice inthe country by searchin for loopholes and possible improvements in the accounting standards currently being aad Mustrative example: Zed is currently enrolled in a BSA program in the Philippines. Fe 7” iti . For his project, he was tasked to report on the condition of the consumer aves industry in the country. He must also explain how the businesses in the industry operate. To accomplish his project, Zed can take a look at the financial statem, \f i a f i st businesses like Procter & Gamble and Unilevér. Being the top two businesses, in the industry, the performances of P&G and Unilever are a good indicator of the Condition of the industry, The i usiness Z . x pit lls 1 Nature of the operations of these bt es can also be seen in their financial the economy.Public The general public is the last group considered to be i an external general public concern themselves with the condition of a company even thereh oes “ not have any plans to deal with said company? What igh they do v ft are the benefits derived public in the financial statements of a company? We will answer these wae Companies undoubtedly affect the whole economy. By continuing to operate, companies create jobs for the public. The results of company operations also pull the economy toward growth or recession. Financial statements give us hints about the condition of the economy. If the economy is not doing well, the general public cut on their spending and increase their savings. The contrary is true if the economy is prosperous. By analyzing the financial statements of companies, the public can properly respond to the various economic cycles. The public’s behavior concerning their levels of consumption and spending is not the only thing affected when they study financial statements. Since financial statements taken together can represent the economy, other decisions of the public that can be affected involve: 1. whether or not itis wise to start a business given the current economic conditions; 2. to stay on your current job or look for a higher-paying job; 3. determining the best use of a person's resources (i.e., where to put your money); and 4, determining the optimal level of savings and consumption. This list is not exclusive. There are still many decisions that can be affected when a person studies the financial statements of companies. What is being emphasized here is the effect of accounting information provided in the financial statements to the general public. 1. Who are the external users of accounting information? Explain the specific needs of each type of external user. 2. In your own point of view, which external user benefits the most from accounting information? Explain. 3. How can the operations of a company affect the general public? Is the effect on the general public direct or indirect? Explain. Internal Users Management Accounting information is processed into summarized financial statements not only for the benefit of external parties, People inside the company are interested users as well. _ Management is composed of employees within the company that can implement decisions affecting the company’s operations. Members of the board of directors, top Management, middle-level Managers, and supervisors are the common classes of employees belonging to the management group, From here on out, we will collectively refer to them asmanagers.’ The key distinction between managers and other employees is the managers authority to make judgments for the company. Managers often function as the brain of the company. Thus, information pertaining to company operations is often given to them, By examining financial All managers must know the company inside and out. 2 3 woritd hem accordingly. Some statements, managers are able to identify problems and respond to ther problems faced by managers include, but are not limited to the following: 1, What areas of the business are becoming problematic? 2. What segments of the business underperformed during th the cause of such underperformance? 3. _ Is the level of company expenses becoming alarming? 4, How does the company handle its debt? Is the company incurring too much borrowing that will be difficult to pay in the long run? 5. Does the company use its resources in the best possible way? These are just some of the questions that can be answered when managers study the financial statements. Likewise, managers also discover the strong points of the business. If a manager sees that the business is performing well in a particular segment, he or she may further devote the company’s resources to this profitable segment. The benefits provided by accounting information to managers are seemingly unlimited. Illustrative example: Fix It Beauty Salon is one of the largest and most successful salons in the country. For the past 5 years, Fix It earned significant amounts of profits. Financial statements from the previous year indicated a net income of 10M, During the first quarter of the ensuing year, revenues of the company are well below budgeted amounts, The first quarter's poor performance alarmed the owners, so they asked Mr. Louie Tan, head of company operations, to identify and solve the problem. e last period? What is By examining the financial statements, Mr. Tan noticed that 10 out of 25 branches of Fix It had revenues below the budget. He also noticed that the marketing and advertising expenses of these branches were also materially below the budget. He found out that managers of these branches cut on the advertising expense in hopes of improving the net income figure. This plan obviously backfired since revenues lost are greater than the savings from marketing and advertising. Mr. Tan immediately ordered the Managers of th a branches to follow the proposed advertising expense in the next quarter. . Employees Some employees of a business, aside from managers, sometimes t; i " lake company’s financial statements. Unlike managers who examine the finsinclel took at the to make better decisions for the benefit of the company, these employees us; iments statements primarily for personal reasons. € financial Employees are concerned with the company’s profitability. If the working for is profitable, employees feel that they will timely a adequate es are compensation and additional benefits. Additional benefits include year-end onus f pried benefits (e.g., medical insurance, transportation allowances), remuneration packages pee termination pay. The current condition of a company also impacts employee inorale. and performance. Companies that are performing well almost always have employees that aremotivated. On the other hand, employee demotivation might be the effect of not meeting company goals. Owners or Stockholders Owners or stockholders are the existing investors of the company, They are to be distinguished from the potential investors discussed earlier in the chapter. Owners or stockholders already invest their resources in the company. In other words, they have already taken the gamble. Some owners or stockholders take an active role in the management of the business while others just wait for the generation of profits. Whatever their role in the business might be, all owners or stockholders are interested in the results of company operations. Predominantly, owners or stockholders want to know if their investments will yleld acceptable returns. A profitable business keeps its investors happy. As a result, investors would not liquidate their ownership. They might even provide additional resources while the business is enjoying success. Meanwhile, businesses who fail to achieve desired profit levels usually result in dissatisfied owners or stockholders. 1. Who are the internal users of accounting information? Explain the specific need of each internal user. 2. _ Differentiate external users from internal users of accounting information. 3. Cite similarities and differences of existing and potential investors. Why do they not fall under one classification of accounting information users? Peas |. Classify each of the following as either external user (E) or internal user (I). 1, Academe Creditor Customer Employees General Public Government Management Owners or Stockholders PRPNAnawn Potential Investors46 sment Which among the following is NOT considered an internal user of accountin information? a. Owners of a business b. Senior partners of an audit firm c. Suppliers d. Field workers Which of the following is NOT considered an external user of accounting information a. BIR officials b. Customers c. Production supervisor d. Astudent of accountancy Jason is a professor in accountancy in the BS Accountancy program of the Universit; of the Philippines. He is also a stockholder of Everest Co. In the point of view of Everes Co., Jason is an a. External user b. Internal user © aor d. None of the above The government is also an interested outside party that analyzes a company’s financial statements. Which of the following is NOT performed by the government? a. The government examines financial statements to help companies in formulating business decisions. b. The government assesses the taxes payable by companies through the analysis of the financial statements. The government is the regulatory body that oversees all businesses. The government encourages or prohibits certain business activities depending on their effect on the economy. This group of users of accounting information invested resources to the company with hopes of earning acceptable returns. a. Creditors b. Government an ¢. Potential investors d. Owners or Stockholders Fundamentals of Accountancy, Business, and Management 1Management consists of the following a. b. ca d. Board of directors, supervisors, top management, laborers Top management, board of directors, middle managers, supervisors Top management, supervisors, field workers, board of directors Owners, top management, middle managers, supervisors, laborers Which of the following information in a company’s financial statements concerns creditors? Amount of profit Borrowings of a company Assets of a company a. only b. land Ilonly c. Mandillonly d. Allofthe above Which of the following does NOT fall under the category of customer? a. b. fs d. Daniel, a client of SGV Auditing Firm Banjo, a regular purchaser of deodorant in Aling Nelia’s Sari-Sari Store Ryan, an individual collecting annual payments from Company X Jerome, a loyal gamer in Net X Computer Shop What is most likely to happen when companies are experiencing financial difficulties? a. b. G d. Employees are motivated to work to achieve the company’s goals. Creditors will be more willing to lend to the company to help overcome its financial difficulties. Researchers will lose interest in the company since they mostly study companies that are successful. Investors will postpone or cancel their investments. Some questions of managers that are answered by the accounting information in the financial statements involve the following, EXCEPT What segments are not performing as expected? What is the reason why the company is not achieving targets? lo we need to hire more workers for production? ' Mand iVonly : lone of mnie all of the questions are answered by the accounting information in the fancial statements.ws ars ¢ 4er from potential investors in what aspect? Creditors are wary of the riskiness of a company. és2aithy individuals can only invest not lend to a company. Creditors receive fixed amount of fee in their loans to the business. Creditors are exposed to more risks than investors. iu*.ch of the following is false about the owners of a business? a Owmers of a business are concerned with the profit levels of the company. Owmers of a business are not allowed to take managerial roles in the company. Some owners do not participate in the management of the business. Owmers of a business can also be creditors of the company. ‘ch of the following statements about external users of accounting information is correct? z n a External users of accounting information include the employees of a company. External users of accounting information do not have the capability to acquire information directly from the company. The needs of the external users of accounting information are always prioritized over those of internal users. External users of accounting information are not concerned with the amount of ‘borrowings of a company. What information in the company’s financial statements is the most important for creditors? & Level of profit b. Current borrowings © Revenues d. — Allinformation are equally important. All of the following are benefits of accounting information to managers, EXCEPT E a a. Managers will be able to identify the points of improvement of a company. Managers can react immediately and accordingly to problems identified in the analysis of financial statements. Managers can make better decisions after studying the financial statements. a. Wonly b. Illonly c« ftonly d. None of the above Customers look at a company’s financial statements a To see if it will be beneficial to build a long-term relationship with the company To help members of the academe to gather data for educational Purposes To decide whether or not they will lend resources to the company To estimate the potential returns if he or she plans to transact with the company17. Amina Peramo Co. is a bank organized and operating here in the Philippines. Which of the following is least likely to be a user of its accounting information? a. Top management of the company b. Bureau of Internal Revenue c. _ Internal Revenue Service d. Depositors of the company 18. Which of the following statements about creditors is true? a. Alfred granted a loan to a struggling business. The loan amounted to P1M payable after one-year. Alfred expects only the P1M to be paid to him after the lapse of one year. b. Creditors can invest in a business that is very risky. c Creditors usually receive variable amounts of payment for their resources. | d. Since creditors lend their money to businesses, they are not affected by economic factors such as inflation. 19. Which of the following is NOT an internal user of accounting information? a. ~ Production supervisor b. Beth, an employee who granted a loan to the company «Marie, a financial analyst trying to find the value of a business d. Chief Operating Officer 20. Whats the difference between the academe and the government? a. The academe isan internal user of accounting information while the government is an external user. b. The academe uses accounting information for educational purposes while the government uses it in the performance of its regulatory function. c. The academe uses accounting information for educational purposes while the government uses it to gauge the riskiness of the business. d. The academeis an external user of accounting information while the government is an internal user. 21. Employees are mainly concerned with a. The company’s ability to provide other employment opportunities b, . The management's plan to expand the company to yield more revenues c The company’s ability to pay salaries dq. The cor npany’s ability to pay obligations when they become due 22. ofall the external users which group would least likely examine, a company's financial Statements? | a. General Public b a a : G Credit d. -. i i23. Which statement about the academe is incorrect? a. The financial statements are used to help students understand accountancy wit, less difficulty. b. One reason why researchers study financial statements is to find possible improvements in the accounting practice in the country. ¢. Accounting information are useful only to those in the field of accountancy. d. Professors, like students, can also learn from the financial statements of 2 company. 24. Why are managers considered internal users of financial statements? a. Because they use the accounting information to make decisions for the company b. Because managers aim to improve the company ‘ ¢. Because managers are usually the persons responsible to prepare the financial statements d. Because managers can request accounting information directly from the company 25. Theseinternal users of accounting information are viewed as the brains of the company. a. . Management b. Employees c. Owners or Stockholders d. Board of Directors 26. a All of the following statements describe investors, EXCEPT a. Moneyis the most common form of investment of investors. b. Investors expect to receive their investment back after a specified period of time. c. _ Investors can devote resources to start-up companies, but they will be subject to higher levels of risk. d. The government can be an investor in a business. 27. Which of the following statements about investors is/are true? 1. There is no limit on the amount of return on investment an investor can receive. Il. Onlya few investors put their resources in risky companies. ; Ill. * Investors, like creditors, receive fixed amount of payments in their investments. 'V. The company is obligated to pay investors a certain amount of return every yeal- 4 ay a. tonly‘ land Il only b. c 11,1, and Iv Fan eee ee See28. Which group of users can use general purpose financial statements? 29. a. b. ,e Pn PR eo External users only Internal users only External or internal users Customers, creditors, and potential investors only at is the most likely reason why creditors will not lend toa company? The company’s level of profit is average. Expenses of the company are above the budgeted levels, Revenues generated by the company are below expected levels. The company defaulted on some of its debts last year... 30. Decisions of the general public that can be affected when they analyze financial statements involve the following, EXCEPT Decisions involving establishing a new business Decisions about the level of consumption of spending Decisions about the type of jobs they will apply for a. lonly b. Hlonly c Illonly d. None of the above For the following items, identify if the statements are true or false. Choose the letter that represents the correct combination of answers. Statement | - Financial statements are beneficial to a wide range of external and internal users. Statement Il - Government agencies use financial statements solely for regulation 31. purposes. a. Both statements are true. b, Only Statement | is true. «Only Statement Il is true. d, Bothstatements are false. ; se true. Only Statement Ilis true. inf Aeeeuntina Information 5133. 34. 35. 37. Statement | - Students of accountancy are exposed to multiple financial statements of companies belonging in one industry. Statement Il ~ Whether or not the students will study a particular set of financial statements depends on the riskiness of the company involved. a. Both statements are true. b. Only Statement | is true. c. Only Statement Il is true, d. Both statements are false, Statement | - Investors acquire goods and services from Staternent {I - Customers take into consideration the future commi company. a. Both statements are true. b. Only Statement lis true. c. Only Statement Ilis true. d. Both statements are false. Statement | - If a supplier is having financial difficulties or has a track record of being unreliable, restaurants will probably not ask for its services. Statement Il - Use of financial statements for academic purposes is not confined in the accountancy field. 2. Both statements are true. b. Only Statement lis true. c. Only Statement I is true. d. Both staternents are false. Statement | - Government examines small businesses more closely than large businesses. Statement Il - When the company is insolvent (ie,, liabilities ar investors are paid first before creditors. fe gresler than asset 2. Both statements are true. b, Only Statement fis true. c. Only Statement Il is true. d, Both statements are false. Statement | - Accounting information presented in financial report: _— of the quality of products and services the company provides. Scan bean indicator Statement Il - All else being equal, an investor will decide to invest i higher levels of profit. st in a cor a. Both statements are true, b. Only Statement lis true. c. Only Statement His true. d___ Both statements are false, companies fora fee. itments of a mpany with38. Statement| ~ Having high levels of profit is not much of an upside if the company still has huge amounts of debts Statement Il ~ Different presentations of accounting information are required by the different users of financial statements. a. Both statements are true, b, Only Statement lis true. c. Only Statement Il is true. d. Both statements are false. 39, Statement | - Managers use accounting information to decide what segments of the company should be discontinued, Statement II - Accounting information included in general purpose financial statements are the most useful source of information for managers. a. Both statements are true. b. Only Statement I is true. ¢c Only Statement Il is true. d. Both statements are false, 40. Statement | - The primary reason why employees need accounting information is to enable them to perform better for the benefit of the company. Statement Il -The regulatory function of the governmentis disposable since businesses have no incentive to misrepresent the results of the company’s operations. a, Both statements are true. b, Only Statement | is true. c. Only Statement Il is true. d. Both statements are false. 41. Statement | - The benefits of accounting information to managers are, seemingly unlimited, Statement Il - An analysis of the financial statements is more important for one- time customers than customers who plan to build a long-term relationship with the company. a, Both statements are true. b, Only Statement Iis true. Only Statement Il is true. _d. Both statements are false. 42. ‘Statement | ~ It is beneficial for a presentation style that will cater to the needs of eac! Statement Il -The creation of jobs of a company is 0 . Both statements are true. company to prepare financial statements with a h user group. if great concern to the public. b, Only Statement lis true. ¢. Only Statement Ilis true. d. Both statements are fal:43. 45. a 46. 47. Statement | ~ Creditors face more risk than investors. Statement Il - It can be said that internal users enjoy an advantage over external users ‘on the quality and amount of information they receive. a. Both statements are true. b. Only Statement | is true. ¢. Only Statement Il is true, d. Both statements are false. Statement |~Managers differ from other employees in their authority to make business lecisions. Statement Il - Information about profit levels is enough for investors to decide whether they will invest in the business or not. a. Both statements are true, b. Only Statement | is true. c. Only Statement Il is true. d. Both statements are false. Statement | - The government is the only entity affected when businesses provide accounting information that is false and unreliable. Statement Il - Michelle placed her money in the business of her friend, Robert. She receives payment in the form of dividends whenever the company is doing well. Michelle is a creditor of the company. a. Both statements are true. b. Only Statement I is true. c. Only Statement Il is true. d. Both statements are false. Statement | - Accounting information helps potential investors know with certainty the amount of returns they will receive on their investments, Statement II - Customers are the main factor contributing to a company's success. However, customers are not the only group of persons essential to the success of a business. a. Both statements are true. b. Only Statement is true. c. Only Statement Il is true. d. Both statements are false. Statement | - Accounting information is not useful if it is communicated in an untimely manner. Statement Il - There is one standardized way of communicating accounting information to different interested parties. a. Both statements are true. b. Only Statement| is true. c. Only Statement Il is true. d. Both statements are false.4B. 49. 50. 51 82, f qd. Both statements are false, ataternens 1 mccounting intormation helps external users in making decisions for the benefit of the company. ° Statement Il - Accounting information contained in the financial statements should be presented in a standardized manner, a. Both statements are true. b. Only Statement lis true. c. Only Statement Il is true. d. Both statements are false, Statement | - Often, internal users are also responsible for the communication of accounting information to external users, Statement II - Once creditors or potential investors receive the financial statements, they are obliged to lend or invest money to the company. a. Both statements are true, b. Only Statement lis true. c. Only Statement Il is true. d. Both statements are false. Statement | - Normally, creditors receive varying amounts of payment from the business. Statement Il - Creditors are less concerned with the riskiness of a company than the customers. a. Both statements are true. b, Only Statement| is true, c. Only Statement Il is true. d. Both statements are false. Statement | - External users include creditors, customers, the general public, and all investors, Statement Il - Owners or stockholders are part of management if they take an active tole in the operations of the business. a. Both statements are true. b, Only Statement lis true. co Only Statement Statement ES internal |users of accounting information use both general purpose and special py lurpose finan statements. Statement Il - Special purpose financial statements can also be used by external users tohelp them in their a53. 54. 55. 56. sé Both statements are true. Only Statement 1 is true. Only Statement Il is true. aoge Both statements are false. Statement I~ All large businesses are not customers since they can produce everything within the company. Statement I - Professors can demand accounting information directly from the company. a. Both statements are true. b. — Only Statement | is true. © Only Statement Il is true. d. Both statements are false. Statement | - Due to the power given by law, the government can sometimes require businesses to provide them with accounting information even though the government is considered an external user. Statement ll - Investors and creditors are alike except in the variability of payment they receive from the company. a. Both statements are true. b. Only Statement lis true. Only Statement Ilis true. d. Both statements are false. Statement | - Additional benefits of employees include retirement benefits, year-end bonuses, and their monthly salaries. Statement Il - The difference between potential and existing investors is the fact that potential investors have already taken the risk. a. Both statements are true. b. Only Statement lis true. c. Only Statement Il is true. d. Both statements are false. Statement | - Accounting information are summarized into reports before being communicated to all interested parties. Statement Il - Other fields of study like economics, entrepreneurship, and banking anc finance also use financial statements in their fields. a. Both statements are true. b. Only Statement | is true. ¢. Only Statement Il is true. d. Both statements are false. Wile57. 58. 59. Statement | - 5 mai i: sats ent | - Government's main role is to scrutinize businesses, especially the small Statem: ~ Unli it lement Il Unlike creditors who are assured to earn the interest and fees, Investors may win or lose in their investment. a. Both statements are true. b, Only Statement| is true. c. Only Statement lis true. d. Both statements are false. Statement! -The governmentis not permitted to be investors or creditors of businesses. Statements I! - Banks are the most common creditors of a business. a. Both statements are true. b. Only Statement is true. c. Only Statement Il is true. d, Both statements are false. Statement | - The level of profits presented in the financial statements isa primary concern for investors. Statement Il - The income is a good indicator of the profitability of a company. a. Both statements are true. b. Only Statement | is true. c. Only Statement Il is true. d, Both statements are false. Statement |- Ifa company’s profits are consistently high, creditors will feel more secure that the company will not default on its debts. Statement Il - A profitable result of operations isa signal high levels of risk if they decide to deal with the company. | that the customers will take a. Both statements are true. Only Statement | is true. b, ic Only Statement lis true. d. Both statements are false.