Identify the various user groups that need accounting information (answer attached)

identify_the_various_user_groups_that_need_accounting_information__answer_attached.zip

Identify the various user groups that need accounting information and the characteristics of the information that they need Participate in managerial decision processes requiring the input of accounting based information

Internal

Running head: Accounting information

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Accounting information

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Accounting information
Student Name

University Name

Picket, n.d. defines internal controls as mechanisms to ensure objectives are achieved. Good controls encourage efficiency, compliance with laws and regulations, sound information, and seek to eliminate fraud and abuse. Internal control is also a process designed to provide assurance regarding the achievement of objectives in the effectiveness and efficiency of operations, reliability and internal and external reporting, and compliance with applicable laws and regulations and internal policies.

Everyone in the organization has some role to play in the organization’s internal control system. The board of directors is responsible for the company’s system of internal control and it sets appropriate policies on internal control and seek regular assurance to ensure that the system of internal control is effective in managing risks in the manner which it has approved. It is also the role of the management to implement board policies on risk and control and all the employees of an organization have some responsibility for internal control as part of their accountability for achieving objectives. Management also needs to review the effectiveness of internal control by forming its own view on effectiveness after due and careful enquiry based on the information and assurances provided to it.
A few examples of internal control activities are as follows: (1) Tracking of major agency achievements and comparing these to the plans, goals and established objectives by the management. (2) Establishing physical control to secure and safeguard vulnerable assets. (3) Use a variety of control activities in information processing. (4) There should be a proper execution of transactions by making sure they are authorized and executed only by persons

acting within the scope of their authority. (5) Segregate the key duties and responsibilities to reduce the risk of error or fraud. (6) Appropriate documentation of transactions and other

significant events and they should be readily available for examination. (7) Establish finance committee to spearhead planning and monitoring of financial activities and reporting. (8) Design an effective organizational structure that takes into account the culture of the organization which is critical for effective financial management. (9) Effective management controls which includes methods of financial planning and budgeting and reporting of actual results and follow-up of variances between budgeted and actual amounts.

There are two groups of users of accounting information: internal users and external users. The internal users are the company managers who use the accounting information to decide how to plan and control operations on a daily and long-term basis while the external users are the existing or the potential investors, creditors, analysts, financial advisers, regulatory authorities, unions and the general public. The accounting information is used as a basis for decision making whether to buy, hold, sell, lend, continue a relationship, or make an agreement. The accounting information that internal users need is the managerial accounting which is the recording and communication of economic information that may or may not be in accordance with Generally Accepted Accounting Principles (GAAP). The external users need financial accounting which is the recording and communication of economic information in accordance with GAAP. Internal users include the management of an enterprise which has the primary responsibility for the preparation and presentation of the financial statements; the employees and their representative groups who are interested in the stability and profitability of their employers which enable them to assess the ability of the company to provide remuneration and other employee benefits. External users include the investors who provide the risk capital and they need information to help them determine whether they should buy, hold or sell stocks in the

company; lenders are interested in information that enable them to determine whether their loans and the interest will be paid when due; suppliers and other trade creditors want to determine whether amounts owing to them will be paid when due; customers are interested about the continuance of a company, especially when they have a long-term involvement with, or are dependent on, the company; government and their agencies want to know about the allocation of resources and, therefore, the activities of the company in order to regulate the activities of the company; the public may need information about the trends and recent developments in the prosperity of the company and the range of its activities.

There are general key characteristics of accounting information that these users have. One is understandability which implies the expression with clarity of accounting information. Another one is relevance as the information must be useful and must assist a user to form, confirm or maybe revise a view in the context of making a decision. There must also be consistency in the treatment of similar items and application of accounting policies. The information that is presented must also be truthful, accurate, complete and capable of being verified. Accounting information must be objective and prepared and reported in a ‘neutral’ way and not biased toward a particular user group or vested interest.

References

http://www.uleth.ca/audit/Internal%20Control/def_of_internalcontrols.htm
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http://www.icaew.co.uk/index.cfm?route=120907

http://www.google.com/url?sa=t&source=web&ct=res&cd=1&url=http%3A%2F%2Fwww.state.ar.us%2Fdfa%2Faccounting%2Fguide%2Fappendices%2Fp2_19_4_505 &ei=XBO-SdK_N5D67APNnaTUBA&usg=AFQjCNEjv-PRPH7hWpPpJy9DwlXZhFs8jA&sig2=mV6UfFxjGy-MRel6-W-BZw

http://www.187gerrard.com/financial/internal%20control.htm

http://www.streetauthority.com/terms/a/accounting.asp

http://answers.yahoo.com/question/index?qid=20080221125729AATj2Tk

Accounting information 2

Running head: Accounting information

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Accounting information

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Accounting information
Student Name

University Name

Accounting information

Identify the primary users of accounting information and their information needs:

The general users of the accounting information are usually having stake in the business organisation but the primary users are the people who have financial stake in that company or organisation or takeholders? According to many resources, users and demanders of Accounting information can be:

Managers & Employees: these parties demand accounting information in order to help mangers to facilitate decision making and enable employees to monitor the management performance. They also can help management to formulate contracts and agreements according to the status of the company.

Investors and Shareholders; these parties range from individuals with limited resources to large wealthy institutions such as banks and investment funds. Their decision can include buying sale shares and selecting the appropriate time.

Lenders, creditors and other financial institutions: the ongoing relationship that exists between a firm and the suppliers of its loan capital, (e.g. a bank). In the initial loan granting stage of the relationship, financial statements typically are an important item. Many banks have standard evaluation procedures that demand information relating to financial liquidity and profitability, which are considered when specifying the amount of the loan, interest rate and the security to be requested.

Business partners or agents and customers: the relationship between a firm and its customers can extend over many years. In some cases, these relationships take the form of legal obligations associated with guaranties, warranties, or deferred benefits. In other cases, the long-term association is based on continued attention on customer service.

Government bodies (e.g. Taxation): the demand by these bodies can arise in a diverse seat of areas such as revenue rising, e.g. for income tax, sales tax, or value assed tax collection. Government contracting.

However, accounting information is not restricted to major companies or businesses. Individuals use accounting information everyday. Bank statements, income tax payments and investment (shareholder in business) are all examples of how ordinary people can use accounting information to make their decisions. We can evaluate our performance by our credit history in our bank or by the bank statement that could act as income statement in some occasions.

The question of the reliability of accounting information rose in the last few years when 2001 marked the fall of the energy giant Enron Corporation as result of the illegal accounting practices by consulting firms and internal accountants. These issues have led a universal reaction about the whole issue and many countries including U.S, Japan and in the E.U have taken tougher rules to ensure that accounting information is accurate and truthful.

As mentioned earlier, different users of the accounting statements may have conflicting interests. For example, there might be a conflicting relationship between the company shareholders and the management team appointed by the shareholders themselves. Shareholders, want to make sure that the money they have invested in the firm is going to get them good return. Moreover, this can be assessed by how much profit the firm is making and whether the values of their shares are increasing according to the business value.

On the other side, the management team is responsible to the owners / shareholders in carrying out policies and directives, and in running the business efficiently and effectively. They however, need to be paid well and this increases expenses and thus reduces returns to shareholders. The management also has to deal with the employees who will refer to the accounting statements to measure their performance contributed to the firm profits. Thus, management usually compensates their efforts with bonuses and salary increases. This also increases expenses to the firm in future.

Accounting information

Running head: Accounting information

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Accounting information

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Accounting information
Student Name

University Name

Accounting information

Internal controls may be system, method or procedure to carry on activity. It helps management in safeguarding assets; prevent leakage of revenues and effective utilization of resources. It helps interaction and coordination of two departments of an organization. As the internal controls are defined in advance, therefore it helps in avoiding disputes among employees. As it is written form therefore it may be used as evidence at the time of dispute. It an activity is not carried on as desired, at that time internal control may identify who is responsible for the error. It is not possible to say that due to internal control there will be no fraud, but it will reduce the risk of fraud that may happen.

Internal control may be developed for any activity. But some of the areas which require good control, like cash receipts and payments, sales and collection, inventory management, fixed assets etc. For fixed assets the advance capital budgets are made. If the purchase cost of a fixed assets increase by certain percentage it requires approval by the board of directors. Rate of depreciation and method of depreciation are predetermined. All repairs and maintenance and capital expenditure less than a limit are not capitalized but recorded as an expense. To make sure the internal control are implemented an internal audit department is formed. It is the responsibility of internal auditor to develop, implement and to make sure that all activities are carried on according to internal control.

For all sales activity on credit basis, the special journal is maintained; it is also the part of the internal control. All invoices are numbered serially, and they are entered into the sales journal, to make sure that all credit sales have been recorded properly. Bank reconciliation statement is also the part of internal control. It is made to make sure that the balance in bank and balance in your book are the same.

All the adjusting entries are made to make sure that the balance in each account gives a true and fair view of the financial position of the company. If the adjusting entries are not made, the profit or loss will not be correct and also the assets, liabilities and capital in balance sheet will also not represent the true and fair view of the financial position of the company. If an adjusting entry for prepaid insurance amounted to $500 per month and for three months it is equal to $1500. It will understate the expense of insurance by $1500 and will overstate the prepaid insurance by the same amount for the year. It means that the income statement would be showing more profit as the expense would be on the lower side and the balance sheet would be showing more current assets. Thus the financial position of the company for the year would not be true and fair.

If all the cash is receipt and recorded by one person, it shows that there is lack of internal control of segregation of duties. The amount should have been received and recorded by two different employees of the company. The journal entry is made to ensure that both aspects of a transaction have been recorded. If a journal entry is passed wrongly, it depends what kind of mistake has been made, if both debits and credits have been entered wrongly, it will not give a true and fair view of the financial position of the company. For example, if a utilities expense has been recorded as $500 instead of $4500 and the same mistake has been made with cash. The expenses in income statement will be understated by $4500 and cash in balance sheet will be understated by $4500. Neither profit nor assets will be representing the true picture of the company. But if suppose only one aspect has been entered wrongly then it will be caught while making trial balance. In our above example, if only cash has been wrongly recorded as $500 but not the other account, then the trial balance will not agree and the mistake can be rectified at that time, thus no impact on financial statement.

Following are the limitation of internal control.

a. The internal control does not provide absolute assurance that the objective has been achieved. However it provides reasonable assurance that objective has been achieved.

b. The internal control may be used to set the target and objective within the organization but it does not cover strategic aspect, which are outside the company, such as market competition.

c. It provides the timely progress and feedback on achievement of strategic and operational objective but it does not give the guarantee of the achievement of those objectives.

Reference:

http://en.wikipedia.org/wiki/Internal_control#Limitations