Question

Discuss the purpose of each of the following financial statements: income statement, balance sheet, statement of cash flow and statement of owner’s equity. Identify five business questions that can be answered by using financial accounting information. For each question, indicate what financial statement (or statements) would be most helpful in answering the question, and why.

Answer 1

Every business maintains records for all its transactions with others. Recording, classifying and summarising the data is called accounting, and the transactions all links with finance, hence called as financial accounting. The important statements in this process are:

• Income statement: reveals the financial earning performance of the firm over a period of the time, usually for one year. In this all the business transactions were recorded for the period, finally after made all expenses, it shows the profit or loss to the firm. This statement also called as profit and loss account or earning statement.
• balance sheet: is the statement of assets and liabilities of a firm on a specific date. It records what the firm owns and what the firm borrows from outsiders and the amount invested by owners in the business.
• cash flow statement: reveals the sources of cash/funds to the business and the application of these cash/funds. Usually a firm raise cash from 3 different activities vis.a. operating activities, financing activities and investing activities.
• statement of owner's equity: is the portion of shareholders funds, which includes the equity share capital, reserves and surplus, plus any other reserves belongs to owners.

the questions in business related about the firm are:

1. what is the gross sales: while looking into profit& loss account we can answer the question, this statement reveals the gross sales as well as net sales of the firm for the year.
2. what is the gross profit or net profit to the firm: profit and loss account
3. what is the position of cash on a given date: cash flow statement
4. what is the liquidity and leverage position of the firm: by looking into profit & loss account and balance sheet it can be answered.
5. what is the dividend or EPS of the firm: by looking into balance sheet, it can be answered.