Which of the following best describes financial accounting?

• A. It is primarily concerned with tax planning and compliance with tax laws.
• B. It focuses on preparing financial statements for external users such as investors and creditors.
• C. It deals with auditing the internal controls and processes of an organization.
• D. It involves tracking and analyzing costs for internal management decision-making.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the scope of financial accounting. Financial accounting is primarily concerned with the preparation of financial statements that provide information about a company's financial performance and position to external users such as investors, creditors, and regulatory agencies.
2. Step 2: Differentiate financial accounting from other accounting fields. Unlike tax accounting, which focuses on compliance with tax laws, or managerial accounting, which involves tracking and analyzing costs for internal decision-making, financial accounting is externally focused.
3. Step 3: Recognize the purpose of financial statements. Financial accounting aims to provide standardized and reliable financial information through statements like the income statement, balance sheet, and cash flow statement.
4. Step 4: Eliminate incorrect options. The option about tax planning and compliance pertains to tax accounting, while auditing internal controls is related to auditing, and tracking costs for decision-making is part of managerial accounting.
5. Step 5: Select the correct description. Based on the above analysis, the correct answer is: 'It focuses on preparing financial statements for external users such as investors and creditors.'