Question

Indicate in the following chart the most likely source of information for each business decision. Use M for managerial accounting information and F for financial accounting information.

Business Decision	Primary Information Source
1. Determine whether to lend to a company.
2. Evaluate a purchasing department’s performance.
3. Report financial performance to board of directors.
4. Estimate product cost for a new line of shoes.
5. Plan the budget for next quarter.
6. Measure the profitability of an individual store.
7. Prepare financial reports according to GAAP
8. Determine location and size for a new plant.

Short answer

Business Decision	Primary Information Source
1. Determine whether to lend to a company.	F
2. Evaluate a purchasing department’s performance.	M
3. Report financial performance to board of directors.	M
4. Estimate product cost for a new line of shoes.	M
5. Plan the budget for next quarter.	F
6. Measure the profitability of an individual store.	M
7. Prepare financial reports according to GAAP	F
8. Determine location and size for a new plant.	M

Step-by-step solution

Definition of Accounting Information Users

Users of the accounting information can be defined as those concerned with the financial information reported in the financial statements for making various decisions such as investment and lending.

Explanation for different accounting information

1. The business entity makes lending decisions by considering liquidity and solvency, which is determined using financial information.

2. The performance of the purchasing department is done using the management accounting information because department-specific reports are prepared under management accounting only.

3. Reporting financial performance to the board of directors comes under managerial accounting because internal users use the information presented by the managerial accounting, and the board of directors are the internal users.

4. For estimating the product cost of a new line product, the business entity will use management accounting information because the product and department-specific information are provided by management accounting only.

5. The business entity will use financial accounting information to make future budgets because financial information reported in the previous periods will be considered for developing plans.

6. Measuring the profitability of the individual store will consider managerial accounting information because information regarding the specific product and department is reported under management accounting.

7. Financial reports are prepared using the information reported in the financial statements and the books of accounts of the business entity, and both are prepared under financial accounting.

8. Determining the size and location of the new plant are internal business decisions, and the management accounting information provides the internal business reports.