Accounting

Question 1:

a) List out the financial statements that reporting enterprises present in their annual

reports. What information can be derived from these statements?

b) What are the objectives of financial statements?

c) Who are the users of financial information? What decisions do these users make and

what information do they need?

d) What are the principle qualitative characteristics of financial information? Explain

these characteristics. Are there other qualitative characteristics? If there are, list and

explain them.

e) List and define the elements of financial statements.

Answers for given questions:

Question 1 (a)

List out the financial statements that reporting enterprises present in their annual reports. What information can be derived from these statements?

Financial statements (or financial reports) are formal records of a business' financial activities. These statements provide an overview of a business' profitability and financial condition in both short and long term. The reports contain financial information about an organization. Financial statements also provide information of value to company officials as well as to various outsiders, such as investors and lenders of funds. Financial statements include notes, which are considered an integral part of the statements. The notes contain required disclosures of additional data, assumptions and methodologies employed, and other information deemed useful to users. The financial statements of publicly owned companies also include an auditor's report, indicating that the statements have been audited by independent auditors. The auditor's opinion is related to fair presentation in conformity with GAAP.

There are four basic financial statements:

1. Balance Sheet

It is referred to as statement of financial condition, reports on a company's assets, liabilities and net equity as of a given point in time. The assets are the firm's resources, financial or no financial, such as cash, receivables, inventories, properties, and equipment. The total assets equal the sources of funding for those resources: liabilities (external borrowings) and equity (owners' contributions and earnings from firm operations).

The balance sheet is used by investors, creditors, and other decision makers to assess the overall composition of resources, the constriction of external obligations, and the firm's flexibility and ability to change to meet new requirements.

Example of Balance Sheet format:

2. Income Statement

It is referred to as Profit or loss statement, the earnings statement, or the operations statement. It presents the details of the earnings achieved for the period. The income statement separately itemizes revenues and expenses, which result from the company's ongoing major or central operations, and the gains and losses arising from incidental or peripheral transactions.

Certain irregular items (such as discontinued operations, extraordinary items, effects of accounting changes) are presented separately, net of tax effect, at the end of the statement. When revenues and gains exceed expenses and losses, net income is realized. Net income for the period increases equity.

The results of the firm's operating activities for the period as presented in the income statement provide information that can be used to predict the amount, timing, and uncertainty of future cash flows. This statement is useful to investors, creditors, and other users in determining the profit ability of operations. The income statement must also show earnings per share (EPS), where the net income is divided by the weighted average number of shares of common stock outstanding. Since EPS scales income by the magnitude of the investment, it allows investors to compare diverse companies of different sizes; hence, investors commonly use it as a summary measurement of firm performance.

Example of Income Statement:

Sample Company

Income Statement

January 1, xxxx to December 31, xxxx

________________________________________

Income

Gross Sales 346,400

Less returns and allowances 1,000

Net Sales 345,400

Cost of Goods

Merchandise Inventory, January 1 160,000

Purchases 90,000

Freight Charges 2,000

Total Merchandise Handled 252,000

Less Inventory, December 31 100,000

Cost of Goods Sold 152,000

Gross Profit 193,400

Interest Income 500

Total Income 193,900

Expenses

Salaries 68,250

Utilities 5,800

Rent 23,000

Office Supplies 2,250

Insurance 3,900

Advertising 8,650

Telephone 2,700

Travel and Entertainment 2,550

Dues & Subscriptions 1,100

Interest Paid 2,140

Repairs & Maintenance 1,250

Taxes & Licenses 11,700

Total