Financial statements are used by several interested stakeholders. List three or more potential external users of financial statements. Explain how each constituent on your list might use financial statement information in their decision making process.
External users and their uses of accounting information include: (a) lenders for measuring the risk and return of loans; (b) shareholders for assessing the return and risk in acquiring shares; and (c) analysts for assessing investment potential. Other users are auditors, consultants, officers, directors for overseeing management, employees for judging employment opportunities, regulators, unions, suppliers, and appraisers.
A firm’s planning activities motivate and shape three types of business activities. List the three activities. Describe how financial statements can provide useful information for each activity. How can subsequent financial statements be used to evaluate the success of each of the activities?
Organizations undertake planning activities that shape three major activities: financing, investing, and operating. Financing is the means a company uses to pay for resources. Investing refers to the buying and selling of resources necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans. Planning is the glue that connects these activities, including the organization’s ideas, goals and strategies. Financial accounting information provides valuable input into the planning process, and, subsequently, reports on the results of plans so that corrective action can be taken, if necessary.
The director of marketing for Starr Computer Co., Megan Hewitt, had the following discussion with the company controller, Cam Morley, on July 26 of the current year: Megan: Cam, it looks like I'm going to spend much less than indicated on my July budget. Cam: I'm glad to hear it. Megan: Well, I'm not so sure it's good news. I'm concerned that the president will see that I'm under budget and reduce my budget in the future. The only reason that I look good is that we've delayed an advertising campaign. Once the campaign hits in September, I'm sure my actual expenditures will go up. You see, we are also having our sales convention in September. Having the advertising campaign and the convention at the same time is going to kill my September numbers. Cam: I don't think that's anything to worry about. We all expect some variation in actual spending month to month. What's really important is staying within the budgeted targets for the year. Does that look as if it's going to be a problem? Megan: I don't think so, but just the same, I'd like to be on the safe side. Cam: What do you mean? Megan: Well, this is what I'd like to do. I want to pay the convention-related costs in advance this month. I'll pay the hotel for room and convention space and purchase the airline tickets in advance. In this way, I can charge all these expenditures to July's budget. This would cause my actual expenses to come close to budget for July. Moreover, when the big advertising campaign hits in September, I won't have to worry about expenditures for the convention on my September budget as well. The convention costs will already be paid. Thus, my September expenses should be pretty close to budget. Cam: I can't tell you when to make your convention purchases, but I'm not too sure that it should be expensed on July's budget. Megan: What's the problem? It looks like “no harm, no foul” to me. I can't see that there's anything wrong with this—it's just smart management. How should Cam Morley respond to Megan Hewitt's request to expense the advanced payments for convention-related costs against July's budget?
I have read over your post a couple of times and I would agree that Megan’s efforts do seem to be in the best interest of the company. My problem with this approach is the fact she is trying to cover up the fact she used less money in the month of July. Her actions seem a little deceitful to the company’s financial institution since she is trying to protect her budget for next year without taking into consideration the financial state of the company. If for some reason the sales of the company plummet the following year, and they are looking to reduce costs in order to minimize the number of employees that will have to be put on low work leave, they cannot use any of the financial data from the advertising budget since it is level across the entire year. The action from Megan protecting her budget has now caused the company to increase the number of employees on low work leave during the month of July compared to if she was honest about her monthly expenses. Megan’s actions are not in the best interest of the company.