Chapter 1 Financial Statements and Business Decisions Revised: April 27, 2014 ANSWERS TO QUESTIONS 1. Accounting is a system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers. 2. Financial accounting involves preparation of the basic financial statements and related disclosures for external decision makers. Reporting is generally on a quarterly and annual basis. Managerial accounting involves the preparation of detailed plans, budgets, forecasts, and performance reports for internal decision makers. Reporting is on an ongoing basis. 3. Financial reports are used by both internal and external groups and individuals. The internal users are the various managers of the entity, e.g. marketing, credit and purchasing. The external groups include the owners, investors, creditors, governmental agencies, other interested parties, and the public at large. 4. Investors purchase all or part of a business and hope to gain by receiving part of what the company earns and/or selling their share of the company in the future at a higher price than they paid. Creditors lend money to a company for a specific length of time and hope to gain by charging interest on the loan. 5. An accounting entity is the organization for which financial data are to be collected. Typical accounting entities are a business, a church, a governmental unit, a university and other nonprofit organizations such as a hospital. A business is defined and treated as a separate entity because the owners, creditors, investors, and other interested parties need to evaluate its performance and its potential separately from other entities and from its owners. 6. The heading of each of the four required financial statements should include the following: (a) Name of the entity (b) Title of the statement (c) Specific date or period of the statement, or the period of time it covers (d) Unit of measure 7. (a) The purpose of the statement of earnings is to present information about the revenues, expenses, and the net earnings of the entity for a specified period of time, in order to help assess its financial performance during that period.