Question

1. (AACSB) Analysis Describe the information provided by each of these financial statements: income statement, balance sheet, statement of owner's equity. Identify ten business questions that can be answered by using financial accounting information. For each question, indicate which financial statement (or statements) would be most helpful in answering the question, and why.

Answer 1

ANSWER

An income statement is a summary of a company’s profit or loss during any one given period of time. The income statement records all revenues for a business during this given period, as well as the operating expenses for the business. An income statement tracks revenues and expenses so that you can determine the operating performance of the business over a period of time and determine what areas of the business are over budget or under budget. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales. They also can be used to determine income tax liability. The income statement will specifically show: sales, cost of goods, gross profit, operating expenses, total expenses, net income before taxes, taxes, and net income (Collins, 2013).

A balance sheet is a snapshot of a business’ financial condition at a specific moment in time, usually at the close of an accounting period. It will show the financial strength and capabilities of the business by identifying and analyzing trends, particularly in the area of receivables and payables. A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity. Assets and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money market, or government securities. At any given time, assets must equal liabilities plus owners’ equity. An asset is anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of the business (Collins, 2013).

A statement of cash flows is a summary of the actual or anticipated incoming and outgoings of cash in a firm over an accounting period. It reports the cash generated and used during the time of the accounting period. Cash flow is determined by looking at three components by which cash enters and leaves a company: core operations, investing and financing.

The business questions that can be answered by using financial accounting information are:

        How much did my expenses cost this year?

• An income statement would answer this question because it tracks the total expenses of a company.

            How much cash has my company brought in this year?

• A statement of cash flows would answer this question because it details the amount of cash coming in.

            How much did I spend on materials this year?

• The balance sheet would be able to answer this question because it outlines the amount of money invested into the operation of the company.

            How much profit did I make this year?

• The income statement would easily answer this question because it determines the company’s income and expenses.

            What were my total assets at the end of last year?

• A balance sheet could answer this question because it shows what assets and liabilities a company had in a given time.

How much is working capital required this financial year?

How to manage finances in case of adversaries?

How much are the losses if any in the financial year?

   What are the main sources of income for the company?

How much liabilities company is owning at present?

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