Purposes of Accounting and Financial Statements

Question 1

What is the Purpose of Accounting?

Answer 1

To Provide users useful financial and non-financial information to allow them to make decisions

Question 2

What is the achieved purpose for an income statement?

Answer 2

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

Question 3

What is the merit purpose for an income statement?

Answer 3

To show the Revenue, Expenses and Net Profit for the period for the (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 limitations of an income statement?

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

Question 6

What Decisions can users make looking at Profit for the year?

Answer 6

Taxes to pay
Ability to repay loan instalments
Buying more assets
Owner Drawing funds for personal use
Ability to ask for wage rises
Better than competition