Usefulness and Purpose of Financial Statement

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Question 1 (1) (a)(i)The purpose of an income statement (profit and loss account) * An income statement is one of the financial statements of a company which shows the company’s revenues and expenses normally over a twelve (12 months) period or a financial year. * The purpose of the income statement is to show how the revenues (money received from the sales), and expenses (money used to buy goods and services) to run the business has been utilized. * In the nutshell the income statement shows the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. * In summary the purpose of the income statement is to show the owners of the business (shareholders or investors) whether the company made or lost money during the period being reported. (1) (a) (ii)Usefulness of the income statement (profit and loss account) * It represents a period of time where the owners of the business can assess the viability of the business going forward. * Secondly it help investors and creditors determine the past financial performance of the enterprise in terms cash generation and the ability to pay its liabilities as it falls due respectively. * Thirdly it predicts future performance of the business and helps planning or where appropriates a remedial action to be taken. * Fourthly it assesses the capability of generating future cash flows through report of the income and expenses which in most cases reflect the true activities of the business. * Fifthly it is one of the important financial statements that show whether there is a loss or profit in the period being reported. 1 (b) Concerns that should be considered Sales (income) £714,123 (2012), £823,425 (2013) * Helen’s income (sales) has fallen to

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