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ACCOUNTING AND THE FINANCIAL STATEMENTS DISCUSSION QUESTIONS 1. Accounting is an information system that identifies, measures, records, and communicates financial information about a company's business activities to permit informed decisions by users of the information. Accounting is often referred to as the language of business because it communicates relevant and reliable information about economic activities of a company that helps people make better decisions. 2. Accounting information is demanded (or needed) by decision-makers both inside and outside the business to provide information about business activities and finances so that informed decisions can be made. Six groups that create the demand for accounting information and their uses of accounting information are described next: (1) Managers use accounting information to help decide which actions to take, predict the consequences of their actions, and evaluate the effectiveness of their past decisions. They also use accounting information to control the operations of the company. (2) Investors (owners) need accounting information about a business to evaluate the future prospects of a business and to decide where to invest their money. (3) Creditors (lenders) need accounting information to decide whether or not to lend money (extend credit) to a business. (4) Governments need accounting information about businesses to determine taxes owed by businesses, to implement a variety of regulatory objectives, and to make national economic policy decisions. (5) Labor unions use accounting information when negotiating wage increases for its members. (6) Financial analysts use accounting information when offering buy or sell recommendations to clients. 3. An accounting entity is a business that has an identity separate from that of its owners and managers and for which accounting records are kept. There are three main forms that accounting entities take: a sole proprietorship, a partnership, and a
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