COMSATS INSTITUTE OF INFORMATION TECHNOLOGY

Assignment:1
I s s u e s i n A c c o u n t i n g P r a c t i c e s

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COMSATS INSTITUTE OF INFORMATION TECHNOLOGY
Assignment:1
I s s u e s i n A c c o u n t i n g P r a c t i c e s

Page 2
Question No. 1
Porter Corporation's
Income Statement
For the Year Ended December 31, 2012
Sales $1,100,000
Cost of Goods Sold
Merchandise Inventory, Jan. 1 $152,000
Purchases $ 692000
Less: Purchase Discounts ($18,000)
Net Purchases $674,000
Merchandise Available for Sale $826,000
Less: Merchandise Inv. Dec. 31 ($125,000)
Cost of Goods Sold $701,000
Gross Profit on Sales $399,000
Operating Expenses:
Selling Expense $128,000
General & Administrative Expense $170,000
Total Operating Expenses $298,000
Operating Income $101,000
Other Revenues & Expenses:
Dividend Revenue $8,000
Interest Expense ($17,000) ($ 9000)
Income before Taxes $92,000
Income Taxes $27,600
Income before Extraordinary Items & Cumulative Effect of Accounting Change $64,400
Extraordinary Loss Due to Earthquake, Net of $15,000 Taxes ($35000)
Net Income $29400
Per Share of Common Stock
Income before Extraordinary Items $1.29
Extraordinary Loss (0.70)
Net Income $0.59















COMSATS INSTITUTE OF INFORMATION TECHNOLOGY
Assignment:1
I s s u e s i n A c c o u n t i n g P r a c t i c e s

Page 3

Porter Corporation's
Retained Earnings Statement
For the Year Ended December 31, 2012
Retained Earnings, Beginning $290,000
Add: Net Income $29400
Less: Dividends Declared ($24000)
Retained Earnings, Ending $2,95,400



Question No. 2
What is the general purpose of financial reporting? Briefly explain in your own words.
General Purpose Financial Reporting:

General purpose financial reporting is not an end in itself, but is a means of communicating
relevant and reliable information about are porting entity to users. The objective specified in this
Statement derives from the information needs of those identified as the users of general purpose
financial reports. Those needs depend, in turn, on the activities of reporting entities and the
decisions users make about them.

Reporting entities control resources and influence members of the community through providing
goods and services, levying prices, charges, rates and taxes, and acquiring and investing
resources. The community interest is best served if scarce resources controlled by reporting
entities are allocated to those entities which will use them in the most efficient and effective
manner in providing goods and services. Efficient use of resources raises output, has desirable
macroeconomic effects by enhancing employment and the standard of living, and enables social
policy objectives to be achieved at the lowest cost. Members of the community make resource
allocation decisions in respect of reporting entities - that is, they make reasoned choices among
alternative uses of scarce resources. For example, investors decide whether to invest in an entity;
creditors decide whether to lend resources to an entity; governments and parliaments decide, on
behalf of constituents, whether to fund particular programmers for delivery by an entity;
taxpayers decide who should represent them in government; donors decide whether to donate
resources to an entity; individuals decide whether to contribute to a superannuation plan;
employees decide whether to sell their services to a particular entity; owners/members of
reporting entities decide whether they should contribute resources to the entity and who should
manage the entity on their behalf; and ratepayers decide whether they should support the
particular programs of their local government and who should represent them on the local
government council.

Efficient allocation of scarce resources will be enhanced if those who make resource allocation
decisions, such as those groups identified above, have the appropriate financial information on






COMSATS INSTITUTE OF INFORMATION TECHNOLOGY
Assignment:1
I s s u e s i n A c c o u n t i n g P r a c t i c e s

Page 4
which to base their decisions. General purpose financial reporting aims to provide this
information.

General purpose financial reporting also provides a mechanism to enable managements and
governing bodies to discharge their accountability. Managements and governing bodies are
accountable to those who provide resources to the entity for planning and controlling the
operations of the entity. In a broader sense, because of the influence reporting entities exert on
members of the community at both the microeconomic and macroeconomic levels, they are
accountable to the public at large. General purpose financial reporting provides a means by
which this responsibility can be discharged.

When general purpose financial reports meet this objective they will also be the means by which
managements and governing bodies discharge their accountability to the users of the reports. The
provision of information for accountability purposes is an important function of the process of
general purpose financial reporting, particularly in relation to public sector entities and non-
business entities in the private sector. However, the rendering of accountability by reporting
entities through general purpose financial reporting is encompassed by the broader objective of
providing information useful for making and evaluating decisions about the allocation of scarce
resources, since users will ultimately require the information for resource allocation decisions.

What a financial report should accomplish:
A financial report should answer certain basic financial questions:
Is the business making a profit or suffering a loss, and how much?
How do assets stack up against liabilities?
Where did the business get its capital, and is it making good use of the money?
What's the cash flow from the profit or loss for the period?
Did the business reinvest all its profit?
Does the business have enough capital for future growth?