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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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A friend, who is not an accounting major, is not familiar with the usefulness of accounting information. The friend states, “I’ve seen you prepare financial statements for homework, but how is the information in these statements useful? What is useful accounting information?”

Required:

Prepare a written response for your friend that identifies and explains useful accounting information.

To determine

Write a memo explaining the usefulness of accounting information.

Explanation

Accounting Information: Accounting information helps in measuring and communicating economic events in business. Accounting concepts and accounting information guides the enterprise in managing the business activities and helps in monitoring the method of invest the money and receiving money.

Memo

From,

ABC

To,

XYZ

Subject: Explanation about the usefulness of the accounting information-reg.

Dear XYZ,

I am glad to that know that you are interested in knowing how the accounting information provided in the financial statement is useful. So, I have explained about the usefulness of accounting information below:

The financial reports prepared by the company provide useful information relating to the economic resources and the claims on the entity. This helps the investors to identify the company’s financial strength, weakness and also assess their liquidity and solvency. The financial information helps in understanding the cash flow status of certain assets and the cash that is required to satisfy the claim of the lenders. With the information provided in the financial reports the capital providers are aware about the company’s financial structure and it also helps them to evaluate the company’s need for additional borrowing and their likelihood in borrowing.

A company should report the effects of the transactions, other events, the situation that changes the company’s economic resources and the claims on the entity and it must also include in its financial reports the measures, information about the financial performance of the company and the cash inflow and outflow. The financial performance of the company must include the information relating to the return earned by the company on its economic resources in its long run, the variability of the return and the components of the return are considered to be important while evaluating the improbability of the future cash flows. The capital providers are aware about the company’s financial performance by using both accrual and cash flow accounting as these methods helps in predicting the future returns on its economic resources.

As per accrual accounting, the company reports financial effects of the transaction, other events and circumstances during the period under which the economic effects occur instead of when cash receipts and payments occur...

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