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The Nature And Purpose Of Financial Accounting

4644 words - 19 pages


1. a. False. Bookkeeping, the preservation of systematic records, is only one aspect of accounting. Accounting also involves structuring the information so that it can be used to evaluate the performance of the company and make decisions about the future.

b. True. Accounting is designed around the tabulation of numerical information. Also, accounting data relate primarily to a company’s financial activities; information about personnel matters, community relations, etc. must come from other information systems.

c. False. Managerial accounting information is used by internal users; financial accounting information is provided to external users.

d. False. The balance ...view middle of the document...

2. Bookkeeping is the preservation of a systematic, quantitative record of an activity. Without bookkeeping, business is impossible. For example, routine bookkeeping is what allows a bank to know how much you have in your account. Without routine bookkeeping, colleges and universities would not be able to register students for courses because no one would know how many spaces were left in classrooms. In a modern, high-tech world, bookkeeping is imperative for tracking what could be millions of transactions in a company, as well as for providing records to be summarized and used for performance evaluation.

3. In order to use a bookkeeping system as an evaluation tool, the different items tracked in the system must be identified by certain important characteristics. For example, sales could be associated with the type of item sold, the clerk making the sale, the time of day of the sale, whether the customer paid with cash or with a credit card, etc. When the characteristics of a transaction are recorded, the data in the bookkeeping system can be sorted and analyzed based on those characteristics. At that point, it is possible to use the bookkeeping system as an evaluation tool.

4. Accounting is formally defined as a system of providing “quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”

5. From an accounting standpoint, the crucial difference between internal users and external users is that internal users, since they work within the company, have the power to custom design accounting reports to meet their specific needs. External users typically must rely on general purpose financial information provided by the company.

6. A company’s balance sheet includes a listing of the assets, liabilities, and owners’ equity of the company.

7. The statement of cash flows includes operating, investing, and financing sections.

8. a. Customers are interested in the long-run staying power of a company. Financial statements provide information that customers can use to assess the long-run prospects of a company.
b. Employees are interested in financial accounting information for a variety of reasons. Financial statement data are used in determining employee bonuses. In addition, financial accounting information can help an employee evaluate the likelihood of the employer being able to fulfill its long-term promises such as for pensions and for retiree health care benefits. Financial statements are also important in contract negotiations between labor and management.
c. Competitors can use financial accounting information to gain insights into a company’s strengths and weaknesses. Competitors can also use financial accounting information as a benchmark for improving their own operations. One of the challenges in setting accounting standards is ensuring that companies reveal enough information to be useful to outsiders without also requiring them to...

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