Page 407 - Introduction to Business

CHAPTER 11 Accounting for Decision Making 381

can be categorized into two major groups: organizations that require or expect
information to be reported and organizations that receive information on an as-
needed basis.
The first group includes organizations that require information to be reported
to them. Federal, state, and local government agencies require business firms to
report specific types of information, usually on a regular basis. The Social Security
Administration, for example, requires regular reporting of payroll information,
including the amount of social security taxes withheld from the employees and
matched by the employer. The Internal Revenue Service (IRS) requires the filing of
an annual tax return as well as the submission of other financial information, like
federal income tax withholdings from employees’ pay, throughout the year. The
government requires publicly traded corporations to provide annual financial
statements to stockholders. This information is filed with the Securities and
Exchange Commission (SEC) on Form 10-K. The same financial statements are
widely used by other external users for a variety of purposes.
In addition to government units that require certain information to be reported,
numerous other external users of accounting information may not require but may
expect certain information to be provided to them. For example, a business firm
may wish to borrow money from a financial institution so that the firm can expand
operations. The financial institution will probably ask the firm to provide certain
financial information, typically the most recent financial statements. If the firm is
publicly traded, then the statements are already prepared for stockholder use. The
financial statements will enable the lender to assess the borrowing firm’s ability to
meet its financial obligations, specifically the ability to pay back the loan. Naturally,
the lender will likely assess other factors as well, such as management’s competence
and general economic conditions. However, the financial statements, or informa-
tion derived from them, may be the most important factor in the lender’s loan deci-
sion. Other external groups that use accounting information include credit-rating
agencies, suppliers, employees, and customers. Exhibit 11.1 (on p. 382) lists external
users and the type of information with which they are typically concerned.
In many cases external accounting information is prepared in a specific format.
For example, the IRS requires tax-related information to be prepared on specific IRS
forms and according to specific procedures.

Accounting Literature: Generally Accepted
Accounting Principles
The financial statements of publicly traded companies must be prepared according
to generally accepted accounting principles (GAAP). GAAP are the guidelines by generally accepted accounting
which financial statements are prepared and are primarily developed by the Finan- principles (GAAP) The principles by
which financial statements are prepared
cial Accounting Standards Board (FASB).
The FASB issues Statements of Financial Accounting Standards (SFAS), which Statements of Financial Accounting
provide the procedures for dealing with specific accounting problems. Guidance Standards (SFAS) Statements issued by
the Financial Accounting Standards
for treating accounting problems is provided in a number of places. Exhibit 11.2 Board that are part of the highest level
(on p. 382) lists the primary sources of authoritative accounting literature. of generally accepted accounting
Determining the appropriate accounting treatment for a particular transaction principles
or event is sometimes a complex process requiring careful research. This research
process is carried out by the accounting information system. GAAP is constantly
evolving. Consequently, financial accountants in the AIS must be careful to stay
abreast of current developments.
There are basically three fields of work for accountants: in the AIS of a business
firm, in a public accounting firm, or in the AIS of a government entity or other

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