Purposes,Limitations,Components and Decisions using of Financial Statements

Question 1

What is the purpose of a Statement of Accounting Policies?

Answer 1

Achieved Level AnswerThe purpose is to inform users of the accounting policies and assumptions that have been applied to prepare the other three financial statements for the (insert name of the Business here).They also provide other relevant information that is not included in the financial statements that assist their decision-making. E.g. market valuations of assets.

Question 2

What is a decision that a user can make using the Statement of Accounting Policies?

Answer 2

Merit Level AnswerThis allows (insert the user name here) to make decisions about (make up a decision relating to the policies and assumptions related to the question).Best one to use is to compare the market values of Assets to Historical Cost of Assets in the Statement of Financial Position to see ( what? Relate to the question)

Question 3

What is the components of a Statement of Accounting Policies?

Answer 3

The terminology in the Statement may be confusing and not understood by all users who do not have a background in Accounting and may confuse them in their decision making. E.g. what is the term Historical Cost mean?

Question 4

What is the purpose of the Income Statement?

Answer 4

Achieved Level AnswerTo show the Revenue, Expenses and Net Profit for the period for the (insert name of the Business here).

Question 5

What is a decision that a user can make using the Income Statement?

Answer 5

Merit Level AnswerThis 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 6

What is the components of the Income Statement?

Answer 6

• Income - Sales or Fees• Other Income• Cost of Goods Sold• Expenses o Distributiono Administrativeo Finance Costs• Net Profit

Question 7

What is a limitation of the Income Statement?

Answer 7

It 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 eg depreciation, doubtful debts which maybe incorrect and so final profit is inaccurate.

Question 8

What is the purpose of the Statement of Financial Position?

Answer 8

Achieved Level AnswerTo measure Assets, Liabilities and Equity at one point in time for the (insert name of the Business here).

Question 9

What is a decision that a user can make using the Statement of Financial Position?

Answer 9

Merit Level AnswerThis allows (insert the user name here) to make decisions about (make up a decision relating to Assets, Liabilities or Equity related to the question). The best type of answer - If the business fails is there enough assets to sell to pay off all loans, or is there enough current assets to covert to cash to pay current liabilities on time.

Question 10

What is the components of the Statement of Financial Position?

Answer 10

o Current Assetso Non Current Assetso Plant Property Equipmento Investmentso Intangible o Current Liabilitieso Non Current Liabilitieso Owners Equity

Question 11

What is a limitation of the Statement of Financial Position?

Answer 11

Assets value are recorded at Historical Cost so market valuation may have changed and the asset maybe either under or over stated.Accumulated Depreciation and Allowance for Doubtful Debts are based on estimatesDoes not show non-financial information. E.g. the quality and age of assets, the ability of staff.

Question 12

What is the purpose of a Cash Budget?

Answer 12

Achieved Level AnswerTo predict the future movements of cash received and paid and change in bank balance over a period of time for the (insert name of the Business here).

Question 13

What is a decision that a user can make using a Cash Budget?

Answer 13

Merit Level AnswerIt highlights areas of financial concern and allows the (user name) time to make decisions about the financial arrangements needed to ensure there is enough cash available to continue to run the business into the foreseeable future. Eg get a new loan, reduce expenses, increase income.

Question 14

What is the components of a Cash Budget?

Answer 14

o Estimated Cash Receipts for periodo Estimated Cash Payments for periodo Estimated Net increase/decrease in cash for periodo Estimated Opening bank balanceo Estimated Closing bank balance

Question 15

What is a limitation of a Cash Budget?

Answer 15

Does not show estimated owners drawings of goods from the firmThe figures are estimates - not based on past financial and non financial information, they may not free from bias by those preparing them.The future is not able to be predicted with complete confidence as unexpected changes may occur e.g. Natural Disasters. This could effect the accuracy of the figures estimated

Question 16

What is a limitation of a Statement of Accounting Policies?

Answer 16

The terminology in the Statement may be confusing and not understood by all users who do not have a background in Accounting and may confuse them in their decision making. E.g. what is the term Historical Cost mean?

Question 17

What is the purpose of the Statement of Cash Flow?

Answer 17

Achieved Level AnswerTo show why the bank balance has changed by showing where the cash has come from and how it has been spent over the period for the (insert name of the Business here).

Question 18

What is a decision that a user can make using the Statement of Cash Flow?

Answer 18

Merit Level answerThis allows (insert the user name here) to make decisions about (make up a decision relating to Cash Received, Cash Paid or change in Bank related to the question).

Question 19

What is the components of the Statement of Cash Flow?

Answer 19

o Cash Receipts for periodo Cash Payments for periodo Net increase/decrease in cash for periodo Opening bank balanceo Closing bank balance

Question 20

What is a limitation of the Statement of Cash Flow?

Answer 20

Does not show any credit transactions. E.g. credit salesDoes not include non cash items. E.g. bad debts, depreciationNo correlation between change in cash and net profit. E.g cash transactions do not reflect the operating performance of the business