CHAPTER 1 DISCUSSION QUESTIONS 1. The three functions of an accounting system are to (1) analyze transactions, (2) handle routine bookkeeping tasks, and (3) structure information so it can be used to evaluate the performance and health of a business. 2. The objective of decision making is to determine an appropriate course of action. The essential elements in the decision-making process generally include the following: problem identification, accumulation and analysis of facts, consideration of alternative courses of action, formulation of a judgment, and action. Accounting assists in this process by providing and interpreting many of the facts (the financial data) to be considered in making decisions. 3. Many personal decisions involve the use of accounting data. Some examples of studentrelated decisions follow: a. Whether to borrow money from a university or from a bank for tuition assistance. b. Whether to buy or lease a car. c. Whether to rent or to buy a house while going to school. d. Whether to invest $200 on an elaborate dinner date. e. Whether to put a new set of tires on the car for a spring vacation trip. f. Whether to invest summer earnings in certificates of deposit or in the stock market. g. Whether to trade in the 10-speed bicycle on a new 21-speed model. h. Whether to buy a season ski pass or pay as you go. i. Whether to eat at the cafeteria or at home. j. Whether to pay cash for a new stereo or to purchase it on a time contract. k. Whether to purchase a laptop computer for schoolwork. l. Whether to go to a private or a state school, given different tuition and other cost structures. m. Whether to live in the dormitory or commute to school. Obviously, this list is not exhaustive. Furthermore, selecting from among these alternatives—like making most decisions— involves many factors besides accounting considerations. 4. The term “business” refers to the general process of producing or distributing goods or providing services. It also may refer to an entity that has been organized to earn a profit. 5. Accounting is considered the “language of business” because it provides the means of accumulating, measuring, and recording the successes and failures of business operations. Accounting also provides a mechanism for communicating the financial results of businesses to the decision makers (e.g., investors, creditors, managers, government, labor unions, etc.). 6. Internal and external users of accounting information have similar needs in that both groups are required to make financial decisions. Managers (internal users) are required to make many day-to-day decisions in running their organizations; they generally need more detailed and more timely information. The information supplied to managers can be in any form that fits the specific questions and circumstances facing the manager. Investors and creditors, the primary external users, need summarized data to assist in making investing and lending decisions. The information supplied to external users should follow generally accepted accounting principles (GAAP) so that the information is consistent and comparable and, therefore, more useful for decision making. 7. Generally accepted accounting principles (GAAP) are accounting standards recognized by the accounting profession and the business community. These standards must be followed when preparing financial statements for external users. Only when concepts and principles prove useful over time are they incorporated into GAAP.