Question

Assume that you have been working as an accountant since the onset of this newly started business. It was started on January 1 of the current year. It is now December 31, and you talk to the owner about "completing the accounting cycle," including preparing a work sheet, financial statements, and journalizing and posting the closing entries. The owner says to you, "I see no need to waste your time or mine in doing this. We have not been very profitable this year. Let's wait until one year from now before doing any of this." What should your response be to him/her? Give any explanations/justifications that you would use to support your answer to him/her.

Answer 1

The general purpose of the financial statements is to provide information about the results of operations, financial position, and cash flows of an organization. This information is used by the readers of financial statements to make decisions regarding the allocation of resources. At a more refined level, there is a different purpose associated with each of the financial statements. The income statement informs the reader about the ability of a business to generate a profit. In addition, it reveals the volume of sales, and the nature of the various types of expenses, depending upon how expense information is aggregated. When reviewed over multiple time periods, the income statement can also be used to analyze trends in the results of company operations.

The purpose of the balance sheet is to inform the reader about the current status of the business as of the date listed on the balance sheet. This information is used to estimate the liquidity, funding, and debt position of an entity, and is the basis for a number of liquidity ratios. Finally, the purpose of the statement of cash flows is to show the nature of cash receipts and cash disbursements, by a variety of categories. This information is of considerable use, since cash flows do not always match the sales and expenses shown in the income statement.