Practice Activity 2.2 Purpose of financial accounting

Can you think of more purposes of financial accounting?

Suggested answers to practice activity 2.2

1. Estimate the amount paid to shareholders as a dividend: A company can use the information about profit to estimate the amount paid to shareholders for investing their money or contributing to the capital of a company. It is not appropriate to pay dividends when there is a loss in an accounting period.

2. Meet audit and assurance requirements: Financial accounting information provides statutory auditors with the information they need to audit a company. Without information about revenue, expenses, assets, liabilities, and equity, statutory auditors will not make an audit opinion. Information about equity, assets, income, expenses, and liabilities is contained in the financial statements prepared by the company's management.

3. Attract prospective investors to the business: Financial accounting information provides information to investors that can be used by prospective investors to decide on whether to invest or not in a reporting entity. If the prospective investor chooses to invest in a reporting entity, financial accounting information can guide that investor on the extent to invest as well.

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