Specific financial decisions often depend more on one type of accounting information than another. Consider the following independent, hypothetical situations:

1. Pierson Industries is thinking about extending credit to a new customer. The terms of credit would require the customer to pay within 45 days of receipt of the goods.

2. Dean Gunnerson owns Toys and Sports Co., a manufacturer of quality toys and sports equipment. The company manufactures a line of mountain bikes and a line of treadmills. Dean wants to know which line is more profitable.

3. The president of Hi-tech Adventure is trying to determine whether the company has enough cash to buy additional equipment.

4. Standen Bank is thinking about extending a loan to a small company. The company would be required to make interest payments at the end of each year for five years, and to repay the loan at the end of the fifth year.

Instructions

a. Identify the type of user of accounting information in each situation and indicate if they are external or internal.

b. For each situation, state whether the user making the decision would depend mostly on information about (1) the business’s economic resources and claims to the resources, or (2) the economic performance of the business. Justify your choice.

Taking It Further:

Why is it important to users of financial statements to know that the statements have been prepared by individuals who have high standards of ethical behaviour?