Acc 290 - Financial Statements

Financial Statements

University of Phoenix

ACC 290

September 5, 2011

Financial Statements

To make sound business decisions, accurate financial information is necessary. Accounting identifies, records, and communicates the financial events of an organization in a manner that can be useful to interested users. These events such as financing, investing, and operating activities are recorded in financial statements. The four basic financial statements are the income statement, the retained earnings statement, the balance sheet, and statement of cash flows. Each of these statements provides specific information about an organization for a specific period of time for different users such as management, investors, creditors, and government entities (Kimmel, P. D., Weygandt, J. J., & Kieso, D. E., 2011).

The first of these financial statements, the income statement, reports revenues and expenses a company occurs during a specific period of time. The result of an organization’s revenue versus its expenses will provide either a net income or net loss. A net income results when revenues exceed expenses, and a net loss results when revenue is less that expenditures. Those results may be interpreted as a period of financial success or failure for the company. Internal users such as managers, production supervisors, and other company employees will examine the income statement and review the amount of money spent during a specific period of time on such operating activities like salaries, supplies, cost of materials, and other operating expenses. For example, a production supervisor can review income statements over several periods of time and notice if the cost of material is consistent with revenue. If discrepancies are found, management can conduct an audit to correct the situation. Likewise, external users such as investors, creditors, and taxing agencies review income statements with the purpose of examining a company’s financial pattern of financial success or failure. For example, creditors need to know what pattern of net income or loss a company sustains to be able to evaluate the risk of lending money to the organization as well as a company’s ability to repay such loan.

The retained earnings statement summarizes what an organization has done with its earnings as well as what changes have occurred during a specific period of time. These changes are usually in the form of dividends paid to shareholders. The retained earnings statement will show the pattern an organization takes toward its growth style. An organization that retains its earnings and pays little to no dividends will show a trend of reinvestment for rapid growth. On the other hand, a company that reports a pattern