Financial Statemetns

1. The income statement or “statement of financial performance” presents a summary of an entity’s income and expenses for a specific period of time. The issue is a net profit (total income > total expense) or a net loss (total income < total expense).

2. The statement of changes in equity shows the changes in owner’s equity during a specific time period. Increases in owners’ equity = owner investments and net profit and decreases in owners’ equity = owner drawings and net loss.

3. The balance sheet or “statement of financial position” lists all the entity’s assets, liabilities and owners’ equity as at a specific date (e.g. end of a month/year).

4. The cash flow statement reports the cash coming in (cash receipts) and the amount of cash going out (cash payments) during a period. The issue is a net cash inflow (receipts > payments) or a net cash outflow (receipts < payments).

Providing information useful to users for making and evaluating decisions about the allocation of scarce resources though the financial statements are important for 2 types of users:

1. External users audited to secure that the company is handling record properly (e.g. loan demand and bank). The preparer must indicate to the reader whether or not the information contained within the statements complies with GAAP. Thus it means that the principles of entity, accounting period, cost, matching, profit recognition, prudence and going concern are recognise and apply by the preparer. E.g. The going concern principle provides a reason why assets are generally carried at cost rather than at market value.

2. Internal users: Owners and manager require financial statements to make important business decision that affect its continued operations. In spite of trying to be relevant and reliable, there are certain limitations for financial