Purposes of Accounting and Financial Statements Flashcards
What is the purpose of a Statement of Accounting Policies?
Achieved Level Answer
The 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.
What is a decision that a user can make using the Statement of Accounting Policies?
Merit Level Answer This 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)
What is the components of a Statement of Accounting Policies?
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?
What is the purpose of the Income Statement?
Achieved Level Answer
To show the Revenue, Expenses and Net Profit for the period for the (insert name of the Business here).
What is a decision that a user can make using the Income Statement?
Merit Level Answer
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)
What is the components of the Income Statement?
• Income - Sales or Fees • Other Income • Cost of Goods Sold • Expenses o Distribution o Administrative o Finance Costs • Net Profit
What is a limitation of the Income Statement?
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.
What is the purpose of the Statement of Financial Position?
Achieved Level Answer
To measure Assets, Liabilities and Equity at one point in time for the (insert name of the Business here).
What is a decision that a user can make using the Statement of Financial Position?
Merit Level Answer
This 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.
What is the components of the Statement of Financial Position?
o Current Assets o Non Current Assets o Plant Property Equipment o Investments o Intangible o Current Liabilities o Non Current Liabilities o Owners Equity
What is a limitation of the Statement of Financial Position?
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 estimates
Does not show non-financial information. E.g. the quality and age of assets, the ability of staff.
What is the purpose of a Cash Budget?
Achieved Level Answer
To 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).
What is a decision that a user can make using a Cash Budget?
Merit Level Answer
It 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.
What is the components of a Cash Budget?
o Estimated Cash Receipts for period o Estimated Cash Payments for period o Estimated Net increase/decrease in cash for period o Estimated Opening bank balance o Estimated Closing bank balance
What is a limitation of a Cash Budget?
Does not show estimated owners drawings of goods from the firm
The 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
