Pete wants a loan of \$1 to start a small business. Which type of accounting would be most relevant for preparing the financial statements required by the bank to assess his loan application?

• A. Tax accounting
• B. Managerial accounting
• C. Financial accounting
• D. Cost accounting

Answer: (C)

Verified step by step guidance

1. Understand the purpose of the financial statements required by the bank. Banks typically require financial statements to assess the financial health, creditworthiness, and ability of the borrower to repay the loan.
2. Recognize that financial accounting is the branch of accounting focused on preparing standardized financial statements, such as the balance sheet, income statement, and cash flow statement, which are used by external parties like banks, investors, and regulators.
3. Differentiate financial accounting from other types of accounting mentioned in the problem: Tax accounting focuses on compliance with tax laws, managerial accounting is used for internal decision-making, and cost accounting deals with analyzing costs for production and operations.
4. Conclude that financial accounting is the most relevant type of accounting for preparing the financial statements required by the bank, as it provides the standardized and externally-focused information needed for loan assessment.
5. Apply this understanding to similar scenarios where external stakeholders require financial information, reinforcing the importance of financial accounting in such contexts.