Vintage Test for you !!

Financial accounting is critical for the operations of a market economy. Full and fair disclosure of business activities is necessary for stakeholders to evaluate the returns and risks they anticipate from investing in and contracting with business organizations. Capital markets, markets in which corporations obtain financing from investors, in particular, require information that permits investors to assess the risks and returns of their investments. If that information is not available or is unreliable, investors are unable to make good decisions. (more…)

Accounting information reported by corporations to investors must be audited. An audit is a detailed examination of an organizations financial reports. It includes an examination of the information system used to prepare the reports and involves an examination of control procedures organizations use to help ensure the accuracy of accounting information. The purpose of an audit is to evaluate whether information reported to external decision makers (more…)

Accounting information prepared for use by external decision makers is financial accounting
information. Financial accounting is the process of preparing, reporting, and interpreting accounting information that is provided to external decision makers. It is a primary source of information for investors and creditors. Thus, it is very important to the organization when it wants to obtain resources from those external decision makers. It also may affect the decisions of suppliers, customers, and employees. Because of concerns about information (more…)

Customers. A company is a supplier to its customers. Thus, it evaluates customers in the same way it is evaluated by suppliers. Managers decide the terms of sales by evaluating the risk and return associated with the sales. Riskier customers normally receive less favorable terms. For example, a customer with good credit can purchase a house, car, appliances, and other goods on more favorable terms than can a customer with bad credit. (more…)

Employees negotiate for wages, benefits, and job security. Compensation is affected by a companys performance and financial condition. Labor unions and other employee groups use accounting information to evaluate a companys ability to compensate its employees. Like other contracting parties, employees evaluate risk and return in an employment relationship. If a company does well, employees expect to be rewarded. If it does poorly, they may face layoffs, wage and benefit cuts, and loss of jobs. Accounting information helps employees assess the risk and return of their employment contracts. (more…)

Decisions by managers have a direct effect on the risk and return of those who contract with a company. Managers decide which resources to acquire, when to acquire them, and how much to pay for them. (more…)

If a company does not earn sufficient profits, it may be unable to repay its creditors, and creditors can force a company to liquidate (sell all its noncash resources) to repay its debts. On the other hand, if a company is profitable, stockholders (investors) normally earn higher returns than creditors because stockholders have a right to share in a companys profits. Creditors receive only the amount of interest agreed to when debt is issued. Consequently, investors and creditors choose between risk and return. (more…)

Contracts are formed to identify rights and responsibilities. These rights and responsibilities establish how risk and return will be shared among contracting parties. Information about risk and return is needed to determine contract terms. Return is the amount a party to a contract expects as compensation for the exchange outlined in the contract. As noted earlier in this chapter, risk is uncertainty about an outcome; it results from uncertainty about the amount and timing of return. Exhibit 11 describes the returns of two investments (A and B) (more…)

The value of accounting information is determined by how well it meets the needs of those who use it. Accounting information describes economic consequences of the transformation process. Information needs of decision makers arise from the many relationships that occur within the transformation process among an organizations stakeholders: managers, investors, suppliers, employees, customers, and government authorities. These stakeholders compete in markets for resources, or they regulate these markets. They exchange resources or services with an organization as part of its transformation process. (more…)

In addition to money provided by owners, businesses (and other organizations) may borrow money. Money may be obtained from banks and other financial institutions, or it may be borrowed from individual lenders. A creditor is someone who loans financial resources to an organization. (more…)