Purpose of Accounting and Financial Statements

Question 1

What is the purpose of accounting

Answer 1

To provide users useful information to allow them to make decision

Question 2

What is the achieved purpose of an income statement

Answer 2

To show the Revenue, Expenses and Net Profit for the period of time (insert name of the Business here).

Question 3

What is the merit answer of an income statement

Answer 3

To show the Revenue, Expenses and Net Profit for the period of time (insert name of the Business here).

This allows (insert the user name here) to make decisions about (make up a decision relating to Revenue, Expenses or Profit related to the question)

Question 4

What are the components of an income statement

Answer 4

Income – Sales or Fees
Other Income
Cost of Goods Sold
Expenses 
Distribution
Administrative
Finance Costs
Net Profit

Question 5

What are 2 limitation of an income statemenet

Answer 5

Does not include non-financial information. E.g. quality of goods or services provided, quality of staff, foot traffic.

Some expenses are based on estimates e.g depreciation, doubtful debts which maybe incorrect and so final profit is inaccurate.

Question 6

What decision can users make looking at profit for the year

Answer 6

Taxes to pay
Ability to repay loan installments
Buying more assets
Owners drawing funds for personal use
Ability to ask for wage rises
Better than competitive