Interpreting financial statements You have already identified the importance of accounting information for both internal and external use in an organisation. The purpose of this week is to appreciate the importance of communication of the financial performance and position of an organisation, both from a numerical viewpoint and also from a critical perspective. It is important to have an awareness of the numerical aspects of financial information in order to appreciate the critical perspectives of why certain concepts and principles are followed in the preparation of financial accounting information. To prepare for this Key Concept Exercise: • Read the Required Learning Resources for Week 2. • Consider the purpose of the income statement. Part A Answer the following questions: 1. An organisation owes £300,000 tax at 1.7.X4 and £450,000 at 30.6.X5. Its income statement for the year to 30.6.X5 includes a tax charge of £400,000. How much tax was actually paid in the year to 30.6.X5? 2. An organisation buys a tangible non-current asset for £200,000. It has an estimated scrap value of £20,000 and an expected useful economic life of 10 years. o What depreciation will be shown in the income statement for year 3? o How would the non-current asset be shown in the statement of financial position at the end of year 3? o If the asset is sold for £120,000 in year 4, how will this affect:  the income statement for year 4?  the statement of financial position at the end of year 4? o How will the sale of the tangible non-current asset affect the firm’s statement of cash flows? Be sure to demonstrate your numerical workings. Part B The income statement and the statement of cash flows, in addition to the statement of financial position, are the three financial statements that organisations cannot do without. The statement of cash flows was the last one to be instituted but is now regarded as a necessity in the accounting field. The following exercise takes a closer look at the statement of cash flows and allows time for your thoughts and consideration of its role. In formulating your Key Concept Exercise, consider the following questions: • What type of information does the statement of cash flows provide investors? • How do changes in liquidity affect an organisation? In an approximately 500-word response, address the following issues/questions: Cash is the lifeblood of any business, and without it survival is very unlikely. Do you agree or disagree? Explain what information a statement of cash flows provides to supplement a statement of financial position and an income statement. Why is there still some controversy surrounding published statements of cash flows? How important are such statements in terms of the financial reporting requirements within YOUR country? Base your answer upon your reading, further research and your own experiences.