Financial Differential Paper

Financial Statements

A financial statement summarizes business transactions that have taken place over a specific period. Internal and external users use accounting information from a company’s financial statement to make effective decisions daily. The financial statements provide the health and stability status of a company based on past and present transactions. The four key financial statements that companies use are the balance sheet, income statement, retained earnings statement, and the statement of cash flows (Kimmel, 2009).

Balance Sheet

According to Kimmel, the balance sheet “presents the company’s financial position as of a specific date” (2009, p. 14). The company’s assets should equal the liabilities and owner’s equity. Managers use the balance sheet for comparison purposes for the changes in each asset and liability within the period. If large discrepancies exist from one period to the next, management has to explain the change and determine if the issue benefited the business or was the result of a bad decision or issue. “Creditors analyze a company’s balance sheet to determine the likelihood that they will be repaid” (Kimmel, 2009, p. 15). The balance sheet helps creditors with lending decisions by comparing a company’s liabilities to its equity. If the company already has a large amount of liabilities, it may become the deciding factor in the decision to approve a loan or other investment decision.

Income Statement

An income statement “reports the success or failure of the company’s operations for a period of time” (Kimmel, 2009, p. 12). The income statement shows what the company made as a profit after expenses, costs, and taxes. The income statement is important for determining if the company is making a profit or losing money. Creditors can see a company’s sale performance and the existing expenses to determine profitability based on history. Management uses the income statement for expense and sales comparison to identify problem areas. Investors want to know company profitability and changes in shares.

Retained Earnings Statement

According to Kimmel, “retained earnings statement shows the amounts and