Quiz 1: Accounting: Information for Decision Making
Accounting Information: Accounting is itself an information about the entity transactions occurred during a particular period. These transactions are recorded in a general journal and transferred the same to financial statements through accounting cycle. The financial statements are used by various users in decision making. Users of Accounting Information: Users of accounting information are the persons or organization that uses the financial statements in taking relevant decisions about an organization. The users of accounting information exist inside and outside the organization. The users who exist inside the organization are termed as internal users and the users who are outside the organization are called as external users. External users have no influence on the day to day operations in the organization. Some of the examples of external users are: Stockholders, Creditors, Customers, Trade Associations.
Integrity of accounting information: The financial statements are used to report the finical accounting information to the external users and to the management. Accounting information should be fair enough to the individuals who rely on it making important financial decisions. There should be integrity in the financial information that is reported to the management. Lenders are the external users of financial information. The lender will be interested in knowing things: • Cash flow prospects • Return of investment. The object of external financial reporting is: To provide specific information about economic resources claims to resources and changes in resources and claims To provide information useful in assessing the amount, timing and uncertainty of future cash flows. FM was in financial crisis and was in scarcity of additional capital. The factors to show risk- free investment by the company are as follows: • In that case it happens to show that the company in is a good position to avoid risk of penalties which will be imposed by the government authorities for uploading the mislead information so as to present fake financial position. • Also risk of losing the shareholders is one of the factor which forces Fannie Mae to not to present the misleading information to the lenders Any misleading statement will not solve the above mentioned purpose and hence the purpose of external reporting will be defeated. Hence, Fannie cannot show misleading information to potential lenders.
Accounting is widely used to describe all types of business activity. It is the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated. Often, Accounting is referred to as "the language of business" because of its role in maintaining and processing all relevant financial information that an entity or company requires for its managing and reporting purposes. Language is a means of communication between people unless the people involved in the communication understand the vocabulary of the language , communication is ineffective. Similarly , investors , creditors , managers , and others who have a financial interest in any business need to have a thorough knowledge of the accounting terms and concepts in order to communicate effectively. Hence , Accounting is referred to as "the language of business"