Question

You are employed as an accountant for Innovative Computing. Your company is in the process of signing a large contract with an electronics components supplier. You have a friend who works for the electronics components supplier, and you are aware of the company having trouble paying bills. You ask to review the financial statements of the supplier.

1.   Would you report this to your employer before the purchase?

2.   What are the four basic financial statements and what do they tell you about a company?

3.   What is the primary purpose of each of the four basic financial statements?

4.   How are the four financial statements interrelated?

5.   In your opinion, explain which financial statement you think is the most important?

Answer 1

1. First of all check the financial records of the company. If company has problems in paying bills, it will reflect in the balance sheet and profit and loss statement as bills payable amount will be higher. After verifying and checking if there is any problem, then report to the employer.
2. 4 basic financial statements are income statement, statement of shareholders equity, balance sheet and cash flow statements. Income statement records all expenses and income and shows profit. Balance sheet shows position of company at a particular date and records all assets and liabilities of the organisation. Cash flow statement shows cash flows form various activities and shareholders equity, EPS, dividends are reflected in statement of shareholders equity.
3. Primary purpose of financial statements is to show clear and fair view of position of the organisation. All data must be clear and correct, so that users can read and understand it clearly and in a better way.
4. All financial statements are interlinked. Net income is shown in all the statements. Figures of one statement is used in formation of other. There are some items that are shown in a particular statement. For example, assets are shown in balance sheet whereas expenses are shown in income statement and net profit in both.
5. Income statement is most important of all as it reveals the ability of business to generate profit. It shows how resources are being allocated as all expenses are recorded therein. Majority of users uses income statement as it shows everything about companys’ performance.