Purposes of Accounting and Financial Statements

Question 1

What is the Purpose of Accounting?

Answer 1

The purpose of accounting is to provide users with 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 (business year or accounting period) for the (insert name of the Business here).

Question 3

What is the Merit purpose for an Income Statement?

Answer 3

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
Cost of Goods Sold
Other Income
Expenses 
Distribution Costs
Administrative Expenses
Finance Costs
Net Profit for the year

Question 5

What are two 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 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 computers