Question

From the perspective of financial accounting, what is meant by an entity’s financial position and performance?

Discuss the importance of information on an entity’s financial position and performance in making economic decisions.

Answer 1

Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an entity at a given date. It is comprised of three main components: Assets, liabilities and equity.Statement of Financial Position helps users of financial statements to assess the financial soundness of an entity in terms of liquidity risk, financial risk, credit risk and business risk.

Statement of Performance, also known as as the profit and loss account or Income statement,  is a report of income, expenses and the resulting profit or loss earned during an accounting period.Income statement is prepared on the accruals basis of accounting.This means that income is recognized when it is earned rather than when receipts are realized, expenses are also recognized in the income statement when they are incurred even if they are paid for in the previous or subsequent accounting periods.

Accounting information is needed to decide whether to invest in a business and whether the entity has the resources to pay debts on time. The process of accounting assists users in the allocation of the scarce money resource. Accounting information is used for a range of decisions by external and internal users.The most important reason to use financial reports is that you have to and required by law to do so