Users & Purposes of Accounting | Answers

Internal or External

Scenario:
A clothing shop wants to open a second branch. Who are the users of accounting information, and what financial reports would each want to see?

Manager
budgets, cost reports, projected revenue

Investor
profitability, return on investment

Bank
balance sheet, income statement, cash flow

Supplier
creditworthiness | ability to pay

Government
tax filings

A bank receives a loan application from a new bakery. What accounting information must the bakery provide? Why does the bank need it?

Income Statement
➛ to show profit/loss

Balance Sheet
➛ to show assets, liabilities, and financial position

Cash Flow Statement
➛ to show ability to generate cash and repay the loan

Tax returns
➛ to verify legitimacy

Business plan or forecasts
➛ to show future potential

Why the bank needs it
➛ To determine risk
➛ To evaluate loan repayment ability
➛ To assess financial stability

Name one internal user of accounting information.
➛ Manager
➛ Employee
➛ Owner
➛ Internal auditor

Name one external user.
➛ Investor
➛ Bank
➛ Supplier
➛ Government
➛ Customer

Why do investors use accounting information?
➛ To evaluate profitability and decide whether to invest.

Employees are external users.
➛ False. | Employees are internal users.

What is one major purpose of accounting?
➛ Decision-making
➛ Performance measurement
➛ Planning and budgeting
➛ Legal compliance
➛ Communicating with stakeholders
➛ Protecting assets

---

Business Types & Accounting Assumptions ➧ Here