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Key Questions and Answers for preparing Financial Statements for Q1

Key Questions and Answers
Key Questions and Answers for preparing Financial Statements for Quarter One (Q1) and subsequent periods
Significance of preparing accounts for interim  periods, in this case, the first quarter period. Accounts can be prepared at any time in the year, that’s why we are preparing accounts for M1, Q1, Q2, Y1, Y2, Y3 and Y4. The accounting methodology is the same for every period. As financial statements are usually prepared annually the purpose is to show that interim accounts can be prepared at any time during the year following the same accounting principles and rules. Financial Statements prepared in the course of the year are also Interim Financial Statements.
Where are we with BIS Ltd.? We have already entered typical transactions and the adjustment for the period, prepared the trial balance and the financial statements following the trial balance for M1. For Q1 we have also entered typical transactions and the adjustments for the period. We will now use the same methodology to prepare the trial balance and financial statements for Q1.
What shape the company is in? As the company is starting operations it has bought vehicles, equipment, employed personnel, pay for rent and general expenses all of which has caused a lot cash being spent in setting up the organisation, however, there are no sales as yet, only cash outflows. When sales start through a strong marketing effort cash will flow in and the financial position of the firm will improve.
What do we need to do? As an overview the steps to be followed to achieve complete accounts are: i) enter recognised transactions in the Journal; ii) post these transactions to the statements in the worksheet for the period, balance sheet, income statement, cash flow statement, changes of equity statement, unadjusted and adjusted; iii) verify correctness of debit and credit entries in the worksheet for the trial balance, unadjusted and adjusted; iv) prepare final financial statements in the same worksheet by posting entries in trial balance to the income statement and income statement; v) present final financial statements in vertical format, as customarily used by firms to prepare their financial statements. Horizontal format can also be used, where needed.
Why do we prepare these statements? What do they mean? Financial statements provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position.
Financial statements may be used by users for different purposes:
  • Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the shareholders.
  • Employees also need these reports in making& collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.
  • Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions.
  • Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.
  • Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.
  • Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.
  • Media and the general public are also interested in financial statements for a variety of reasons.
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