It is said that accounting is the language of business because it communicates financial information about a business enterprise. Proper and correct communication of ideas, plans and facts are very important in business, where accounting plays a very important role by supplying financial information that is vital for the effective management and proper evaluation of any enterprise, as well as the communication and interaction of a business with external factors geared towards a profitable end. The users of accounting information are divided into two groups, the internal users and the external users. The internal users are those who own or are employed or who manage the business, as well as persons whose decisions affect the internal affairs of the business. Among them are the owners, managers, officers, and employees of the said business. The external users, on the other hand, are those outside the business who make decisions concerning their financial relationship with the said business. They are the investors, creditors, customers, suppliers, banks, and government agencies who have existing business relationships with the said business.
For example, for the information on the balance sheet, almost all of the information there are important particularly for the suppliers, investors, creditors, as well as banks. For the figures on the assets part, they examine them as well as on the equity’s part to assess the ability of the company to pay its loans and other debts on them. In case they are short on cash, they can take some of their assets, which they deemed to have enough value to cover their debts. An example is the figure on the total tangible/fixed assets (65200), particularly the buildings which is the most valued asset (55000).
They can also based their decisions on whether they will approve their loan or not, through the examination of the income statement. The reason here is to see if they are earning enough profits to pay for the interest and the cash they will be lending them. For Mr. Brown’s part, even though they are not earning much for the mean time (net loss of 492), it is still not reasonable for them to shut-down their business. They can still borrow some funds to make necessary adjustments to solve the problem. They still have enough assets to use for collaterals or for sale for their source of the needed fund. Creditors and other banks can still have the confidence on lending them money since they only have a current liability of 50 and they have enough cash to use for emergency situations (cash at hand of 195 and cash on bank of 5163). And if ever they will be short of cash, they still have enough assets to be converted into cash (total fixed assets of 65200).
For the investors, it will be their basis on whether they will invest on the said business or not. Through the income statement, particularly for the figure on net income, they will know if the said business is profitable or not, to judge if their investments are worth it, if it will earn enough for them to stay in that business.
Question 3)
First is the Statements of Federal Financial Accounting Concepts number one (SFFAC 1), which is about the objectives of federal financial reporting. It says there that for general financial reporting purposes, federal financial reporters must consider the needs of both internal and external report users, as well as the decisions they make. Objectives are outlined for reported financial information that allows the Federal Government to demonstrate accountability, along with providing useful information to the public and Congress. This is also to help managers use financial information in management decisions.
The second one pertains to Statements of Federal Financial Accounting Standards (SFFAS 4) or the Managerial Cost Accounting Concepts and Standards. The aim of this statement is to provide reliable and timely information on the full cost of Federal Programs, their activities, and outputs. The concepts of managerial cost accounting contained in this statement describe the relationship among cost accounting, financial reporting, and budgeting.
The last concept was on Accounting for Revenue and other Financing Resources and Concepts for Reconciling Budgetary and Financial Accounting or SFFAS 7. Two separate parts are contained in this statement. The first part describes revenue and other financing sources. Revenue is defined as an inflow of resources that the Government demands, earns, or receives by donation. The second part amends SFFAC 2 by adding a new concept to satisfy users’ needs for information that reconciles budgetary and financial accounting. An implementation guide or SFAS 7 is available, which describes the content and presentation of the financial statements.
Credit:ivythesis.typepad.com
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