Answer to Question 1
B
Answer to Question 2
Financial statements are used to convey a concise picture of a company's operating activity over a period of time and its financial position on a specific date. The three basic statements include:
Balance sheet: The purpose of the balance sheet is to show the financial position of an organization on a specific date. It reports major classes and amounts of assets, liabilities, and equity. Assets are either purchased or generated through operations. They are, directly or indirectly, financed by the creditors or investors.
Income statement: The purpose of the income statement is to summarize the performance of the organization over a specific period of time. It explains some changes in the assets, liabilities, and equity of a company between two consecutive balance sheet dates. If prepared using GAAP, the income statement is governed by the matching principle, which provides that performance can be measured only if revenues and related costs are accounted for during the same time period.
Statement of cash flows: The cash flow statement covers the reporting period and serves to reconcile sources and uses of cash, which are classified as operating, investing, or financing activities. This statement helps explain changes in consecutive balance sheets and serves to supplement information provided by the income statement.
