Question

1. Briefly explain the general purpose of each of the three financial statements (the income statement, the balance sheet and the cash flow statement) and the usefulness of each of them for Quartz Antique Furniture Ltd. (20 marks)

Answer 1

Purpose and Usefulness of each of the three financial statements:
1. Income Statement:
Purpose:	The purpose of preparing Income statement is to assess the results of the operations of the organisation for the particular Financial Period. Income statements represent the transactions undertaken during the particular period. As a result of preparation of Income statement we come to know whether operations were carried in profitable manner or they resulted in net loss from operations.
Usefulness:	Income statement is used to know the profitability of the company, it further helps in understanding components of the profits. Whether profits were earned from normal business operations or there were any irregular/extraordinary transaction which resulted in such profit. It is used to calculate earning per share.
2. Balance Sheet:
Purpose:	Balance Sheet is also termed as Position Statement. Balance Sheet represents position of the company as on any given date. Position includes composition of Assets and Liabilities. On any given date Balance Sheet shows compositions of Assets vis-à-vis liabilities.
Usefulness:	1. Balance Sheet is used to assess the financial well being of the company. 2. Balance Sheet can be used to assess whether Financing Arrangements are dependent more on external sources or internal sources. 3. Balance Sheet is used to assess networth position 4. Balance Sheet is used to assess working capital position 5. Balance Sheet is useful in determing Composition of Investments in business assets v/s non business assets.
3. Cashflow Statement:
Purpose:	Cashflow statements are prepared to determine cash inflow and outflow from each of the following three categories of activities: 1. Operating, 2. Investing, 3. Financing.
Usefulness:	Cashflow statements are useful, because cashflow statements assess what happened to cash and cash equivalents as a result of carrying on business in the particular period. Irrespective of whether business has generated net income or net loss, whether the business has been able to honor its cash commitments, whether the business has generated positive cash flows or the business has resulted in decline in cash and cash equivalents.