Financial Statements Paper

Financial Statements

Principles of Accounting/Acct-280

August 4, 2010

Financial Statements

In today's volatile economy, it has become commonplace for many businesses to file for bankruptcy or merge with another company. For the transactions between businesses to be completed, it is vital for the business to exchange financial information, to ensure the transaction is mutually beneficial. All businesses, irrespective of their size and scope, have one underlying commonality, the need to measure and record the financial progress of the business. The methods of generating, compiling and disseminating the financial data may be vastly different, but these methods must exist in some form, to determine the stability and success of the business accurately. The process of identifying, recording and communicating the financial situation of a company is defined as accounting (Weygandt, 2008).

Accounting is an essential part of any business. To fully understand the role accounting plays in formulating a comprehensive picture of the business, it is essential to understand the basic financial statements used in accounting. The four financial statements prepared by accountants of any business are the income statement, retained earnings statement, balance sheet, and the statement of cash-flow (Weygandt, 2008). We will further define each of these statements and their interdependence on each other.

The income statement is the first in the line of the four financial statements to be prepared. The income statement is prepared for a specific time period, usually for a specific month. According to Financial Accounting, by J. Weygandt, an income statement is a representation of the revenues and expenses and resulting net income or net loss of a company for a specific time period. As is apparent by the definition, the income statement shows all the revenues and expenses of the organization, and once the totals are tallied and the revenues exceed the expense, which represents a profit for the company. Likewise, if the expenses outpace the revenues, the company shows a net loss.

The next statement to be prepared is the retained earnings statement. Simply stated, "the retained earnings statement summarizes the changes in retained earnings for a specific period of time" (Weygandt, p. 21, 2008). The retained earnings statement is also prepared for the same time period as the income statement. The beginning amount on the retained earnings is added to the final amount on the income