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Hi, Else here.
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And today we'll be talking about the users and the users
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of accounting information.
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What is accounting?
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Accounting is an information system
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that identifies and records and organizations
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transactions and then communicates them
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to a wide variety of interested users.
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A knowledge of accounting is relevant and useful
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in whatever career you decide to pursue--
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be it marketing or financial analyst.
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Every position requires some knowledge of accounting
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or an understanding of how your actions in your position
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will affect the business overall--
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both their profitability and their progress as they
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move forward.
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You must be able to analyze the information from the past,
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so you can adjust what you do in the future
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to ensure the company you own or work for is profitable.
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You need accounting information to make informed decisions
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about how to move forward.
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So just who are the users of financial information
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and what information do they need to make decisions?
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Users of accounting information are individuals
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who have questions about an organization
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and they need information to find answers and make
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smart decisions.
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They analyze what happened in the past
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in order to predict what may happen in the future.
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To do that, they need detailed accounting information
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on a timely basis.
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There are really two types of users
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of accounting information-- internal and external users.
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Internal users plan, organize, and run businesses.
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They ask questions such as what price should
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we charge for our product or service,
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should we expand on global markets or not,
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what products are profitable, and which
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should be discontinued?
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Internal users have access to a large amount of information
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and they will not be the focus of this course.
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External users are outside of an organization.
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They depend on financial statements
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in order to make informed decisions.
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Investors, lenders, and other creditors
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are the key external users of accounting information.
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They make resource allocation decisions.
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That means that their decisions generally
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involve the giving up or receiving
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of cash, goods, or services.
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So what questions do the main external users have?
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Well, an investor might ask if a business is profitable enough
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to give them a return on their investment.
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A lender might ask if a business will
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be able to repay a loan plus interest when
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the loan comes due.
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And other creditors might ask if the bills
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a company has outstanding will be paid in the future.
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There are other external users that might also have questions.
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Employees and labour unions want to know if they will receive
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higher wages or better benefits.
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Customers are interested in whether a business will honor
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their warranties in the future.
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Tax agencies, like Revenue Canada,
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want to know if an organization is paying appropriate taxes.
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Regulatory agencies, like the Securities Exchange Commission,
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want to know if an organization is
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in compliance with their rules.
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And finally, financial analysts want
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to know if a company is one that they want
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to recommend to their clients.
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But the key external users of accounting information
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are still investors, lenders, and other creditors.
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This is because they are the users who
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make decisions about resources.
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It's important to check your understanding and the best way
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to do that is to test yourself.
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Periodically, you're going to see multiple choice questions.
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I recommend that you pause the video
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and answer the questions yourself
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before you check to see if you've got it right.
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Determining if a company can pay its obligations as they
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come due is the primary objective of which
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of the following users?
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The primary objective of investors, competitors,
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and labour unions is not whether a company can pay its bills
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when they come due.
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Yes, those external users are concerned about that,
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but it's not their primary concern.
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Creditors, also called lenders, have a primary objective.
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And that is whether the company is
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able to pay their bills as they come due.
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What about ethics and accounting information?
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In order for accounting information to be useful,
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it must represent the actual economic activity
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of an organization--
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what we call the underlying truth.
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Preparers of accounting information
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have extensive rules of conduct to guide what they report,
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when they report it, and how they present it
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to interested users.
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Without ethics in accounting, the information
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produced by accounting information systems
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would be useless for decision making.
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Following incorrect information would result in
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not only possibly a financial crisis, but also
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reduced confidence in the information provided
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by accounting systems.
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Ethics and accounting is critical to the health
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of a business and also financial markets.
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And it's a key focus when preparing
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accounting information.
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In the next video, we'll be talking
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about the three main types of organizations
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and the main activities that businesses engage in.