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