Purpose of financial statements

Question 1

Purposes of a balance sheet

Answer 1

• to see the value of a business’s assets, liabilities and owner’s equity
• To determine the liquidity and solvency of the entity (i.e its financial position)

Question 2

Limitations of a balance sheet

Answer 2

• accumulated depreciation is an estimate
• PPE is recorded at historical cost
• It only includes financial information and not qualitative and quantities

Question 3

Purpose of the income statement

Answer 3

• to calculate the total income and expenditure of the entity and determine the net profit or loss (i.e. the financial performance)

Question 4

Limitations of the income statement

Answer 4

• depreciation is only an estimate

- Does not show non-financial information such as quantity or quality of product

Question 5

Purposes of cash budgets

Answer 5

• discloses the cash receipts and payments as well as the projected change in cash for a future time period which is usually 1 year
• can determine the expected change in cash position for the period

Question 6

limitations of cash budgets

Answer 6

• only discloses cash transactions and not credit

- Based on estimates which may not be an accurate reflection of actual cash receipts and payments for the period

Question 7

Purpose of the statement of accounting policies

Answer 7

• discloses the assumptions used to prepare the financial statements for users to understand what measurement basis has been used.

Question 8

limitations of the statement of accounting policies

Answer 8

• users may not understand the terminology