As your business’s chief financial officer, which type of accounting would you primarily use to prepare financial statements for external stakeholders such as investors and creditors?

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

Answer: (A)

Verified step by step guidance

1. Understand the purpose of financial statements: Financial statements are prepared to provide information about the financial performance and position of a business to external stakeholders such as investors, creditors, and regulatory agencies.
2. Identify the type of accounting that focuses on external reporting: Financial accounting is specifically designed to prepare reports and statements for external stakeholders, adhering to standardized principles such as GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards).
3. Differentiate financial accounting from other types of accounting: Cost accounting focuses on internal cost management, tax accounting deals with compliance and tax-related matters, and managerial accounting is used for internal decision-making. None of these are primarily intended for external reporting.
4. Recognize the role of the chief financial officer (CFO): As the CFO, your responsibility includes ensuring accurate and compliant financial reporting to external stakeholders, which is achieved through financial accounting.
5. Conclude that financial accounting is the correct type of accounting to use for preparing financial statements for external stakeholders, as it aligns with the needs of investors and creditors.