Purposes of Accounting and financial statements

Question 1

What is the Purpose of Accounting?

Answer 1

The purpose of accounting is 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

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.

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 fund for personal use
Ability to ask for wage rises
Better than competitors