Financial Statements

Question 1

What are the 5 financial statements?

Answer 1

1. Statement of financial position (balance sheet)
2. Income Statement
3. Statement of Comprehensive Income & Expenditure (Profit and Loss)
4. Statement of Stockholders’ Equity
5. Statement of Cash Flows

Question 2

What does the Statement of Financial Position show?

Answer 2

Balance Sheet - Summarise Assets and Liabilities; the balance sheet provides a snapshot of a company’s financial position at a specific point in time, usually at the end of a fiscal period.

Question 3

What does the Income Statement show?

Answer 3

How the profit was made // Also known as the profit and loss statement, the income statement shows the company’s revenues and expenses over a specific period, typically a quarter or a year.

It starts with revenues, subtracts the cost of goods sold (COGS) to calculate gross profit, then deducts operating expenses and other costs to arrive at net income (or net loss).

Question 4

What does the Statement of Comprehensive Income and Expenditure show?

Answer 4

This statement expands on the traditional income statement by including items that are not part of the core business operations. It can include gains or losses from non-operating activities, foreign currency adjustments, and other comprehensive income items.

Question 5

What does Statement of Stockholder’s Equity show?

Answer 5

This statement shows changes in equity accounts over a specific period. It’s particularly useful for shareholders and investors to understand how their ownership has changed.

Question 6

What does Statement of Cash Flow show?

Answer 6

The purpose of a cash flow statement is to provide a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business.

The cash flow statement acts as a bridge between the income statement and balance sheet by showing how cash moved in and out of the business.

Question 7

What are notes to financial statements?

Answer 7

Notes to financial statements, also known as financial statement footnotes or simply “notes,” are additional disclosures and explanations that accompany a company’s main financial statements. These notes provide important details about the figures presented in the primary statements and offer additional insights into the company’s financial position and performance. Here are common types of notes found in financial statements:

Question 8

Why do we need financial statements?

Answer 8

Financial statements play a crucial role in providing a comprehensive overview of a company’s financial performance and position

1. Merging and Acquisition
2. Taxe Compliance
3. Transparency and Accountability:
   Financial statements provide transparency into a company’s financial affairs, allowing stakeholders such as investors, creditors, and regulators to assess the financial health of the business.
4. Performance Evaluation:
   Financial statements enable the evaluation of a company’s performance over a specific period. By analyzing income statements, stakeholders can understand how well the company is generating profits, while balance sheets provide information about assets, liabilities, and equity.
5. Resource Allocation:
   Management uses financial statements to make informed decisions about resource allocation. By understanding the financial position and performance of various segments or projects, companies can allocate resources effectively and identify areas for improvement.
6. Legal and Regulatory Compliance:
   Financial statements are a legal requirement in many jurisdictions. Companies must comply with accounting standards and regulations, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), which mandate the preparation and presentation of financial statements.

Question 9

What is double-entry book-keeping?

Answer 9

Double-entry bookkeeping involves making two entries for every financial transaction, ensuring that the accounting equation remains in balance.
It requires the use of debits and credits for each transaction, and it allows for the creation of financial statements with a higher level of accuracy than single entry bookkeeping.

In each transaction, the double-entry system ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.

Question 10

What are some different accounting concepts?

Answer 10

1. Entity Concept:
   This concept treats the business as a separate entity from its owners. It means that business transactions are recorded and reported independently of the personal transactions of the owners.
2. Going Concern Concept:
   The going concern concept assumes that a business will continue to operate indefinitely. This concept underlies the preparation of financial statements, assuming that the company will not be forced to liquidate in the near future.
3. Cost Concept (Historical Cost):
   The cost concept states that assets should be recorded at their original cost. This helps in ensuring objectivity and verifiability in financial reporting. However, it may not reflect the current market value of assets.
4. Dual Aspect Concept (Double-Entry Accounting):
   The dual aspect concept is the foundation of double-entry bookkeeping. For every debit entry, there must be an equal and opposite credit entry. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.