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Unformatted text preview: CHAPTER 1 Accounting and Organizations THINKING BEYOND THE QUESTION What do we need to know to start a business? Service businesses and most nonprofit organizations provide services rather than goods. A service business attempts to earn a profit by selling services that its customers need at prices greater than the costs of providing the services. Nonprofit organizations attempt to provide these services but do not attempt to earn a profit from them. However, most nonprofit organizations must still earn sufficient amounts from the ser- vices to cover their costs. Knowledge of services demanded by custom- ers, members, or other constituents and knowledge of the costs associ- ated with providing these services is important to any service-oriented organization. Most of the decisions made by managers of retail businesses must also be made by managers of other organizations. Understanding the factors that affect risk and return are important. All managers require information to make good decisions that will create value for stakeholders. QUESTIONS Q1-1 The purpose of accounting is to help people make decisions about economic activities. This is accomplished by providing information to decision makers that maximizes their likelihood of making decisions that have favorable economic consequences. The availability of reliable information upon which to base decisions reduces the risk that unfavorable economic outcomes will occur. Q1-2 Accounting provides information about results that owners and other decision makers should expect will occur. By understanding past activities, investors may make informed predictions about future events. Thus, accounting information helps reduce risks associated with investing decisions. Q1-3 The purpose of merchandising companies is to sell goods, that are produced by others, to customers. Customers might include either 1 2 Chapter 1 individuals or other businesses. The purpose of merchandising firms is only to transfer goods produced by others. They do not produce goods themselves but create value by providing a convenient selection of goods desired by customers. Manufacturing companies produce goods that they sell to consumers, merchandising companies or other businesses. They create value by combining the goods and services produced by others into products more highly valued than the resources used. Service companies neither produce nor sell goods. They sell services to customers, such as consumers or other businesses. Service companies create value by providing services that customers are willing to pay for. Q1-4 a. Merchandising organizations sell goods to customers for a profit. The goods are obtained from other organizations. Examples include most retail stores: grocery, hardware, department, etc....
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