Chapter 1: The Purpose and Use of
Financial Statements
1.1 - Uses and Users of Financial Statements
Accounting: the information system that identifies and records the
economic events of an organization
Internal Users
● Have access to internal accounting information to help them make decisions
● Access this information as required
● Accounting provides various internal reports (e.g., forecast cash needs and financial
comparisons of operating alternatives).
External Users
● DO NOT have access to accounting information other than what is available to the
general public
● Many other external users, such as:
○ Non-management employees
○ Potential employees
○ Customers
Investors (Owners/ Shareholders)
● Use accounting information to make decisions to buy, hold, or sell their ownership
interest
Creditors (Lenders)
● Such as bankers and suppliers
● Use accounting information to evaluate the risks of lending money or of selling on
credit
, 1.2 - Forms of Business Organization
Proprietorships
Definition: A business owned by one person (the proprietor)
● The owner has full control and is personally responsible for all business debts
(unlimited liability).
● Business income and losses are the owner's personal responsibility.
● The business records must be kept separate from the owner's personal records.
● Common examples include small businesses like hair salons, plumbers, and small
retail stores.
● A proprietorship is easy and inexpensive to set up with minimal capital needed.
● The business's life is tied to the owner's life, meaning it ends if the owner stops
operating it.
Partnership
Definition: A business owned by more than one person
● Partnerships are often formed to combine resources or skills.
● A formal partnership agreement outlines key details, making it more complex and
costly to establish than a proprietorship.
● Each partner usually has unlimited liability for all partnership debts.
● Partnership records must be kept separate from each partner’s personal activities.
Corporations
Definition: A business organized as a separate legal entity owned by shareholders
● It is complex and costly to establish compared to other business forms.
● Shareholders own shares and can become owners with small investments.
● Corporations have an indefinite life, continuing regardless of changes in ownership.
● Ownership is easily transferred through the sale of shares.
● Shareholders typically have limited liability, meaning they aren't responsible for
corporate debts beyond their investment.
Financial Statements
1.1 - Uses and Users of Financial Statements
Accounting: the information system that identifies and records the
economic events of an organization
Internal Users
● Have access to internal accounting information to help them make decisions
● Access this information as required
● Accounting provides various internal reports (e.g., forecast cash needs and financial
comparisons of operating alternatives).
External Users
● DO NOT have access to accounting information other than what is available to the
general public
● Many other external users, such as:
○ Non-management employees
○ Potential employees
○ Customers
Investors (Owners/ Shareholders)
● Use accounting information to make decisions to buy, hold, or sell their ownership
interest
Creditors (Lenders)
● Such as bankers and suppliers
● Use accounting information to evaluate the risks of lending money or of selling on
credit
, 1.2 - Forms of Business Organization
Proprietorships
Definition: A business owned by one person (the proprietor)
● The owner has full control and is personally responsible for all business debts
(unlimited liability).
● Business income and losses are the owner's personal responsibility.
● The business records must be kept separate from the owner's personal records.
● Common examples include small businesses like hair salons, plumbers, and small
retail stores.
● A proprietorship is easy and inexpensive to set up with minimal capital needed.
● The business's life is tied to the owner's life, meaning it ends if the owner stops
operating it.
Partnership
Definition: A business owned by more than one person
● Partnerships are often formed to combine resources or skills.
● A formal partnership agreement outlines key details, making it more complex and
costly to establish than a proprietorship.
● Each partner usually has unlimited liability for all partnership debts.
● Partnership records must be kept separate from each partner’s personal activities.
Corporations
Definition: A business organized as a separate legal entity owned by shareholders
● It is complex and costly to establish compared to other business forms.
● Shareholders own shares and can become owners with small investments.
● Corporations have an indefinite life, continuing regardless of changes in ownership.
● Ownership is easily transferred through the sale of shares.
● Shareholders typically have limited liability, meaning they aren't responsible for
corporate debts beyond their investment.
