Financial Statments

Financial Statements

There are four basic financial statements, the balance sheet, the income statement, the retained earnings statement and the statement of cash flows. I will discuss the purpose of each financial statement and how the financial statements would be useful to internal users such as managers and employees. I will also discuss how the financial statements would be useful to external users such as investors and creditors at any given perios.

The Balance Sheet

The Balance Sheet is a financial statement that reports the assets (what the business owns) and claims (what the business owes) to those assets at a specific point in time, this can also be known as the statement of financial capacity or the statement of financial standing, it is a financial statement that reflects the overall economics; a balance sheet lists total assets opposite to its total liabilities.

The Income Statement

The Income Statement is one of the major financial statements used by accountants and business owners. The income statement shows how successful your business performed during a period of time. On the income statement you report the revenues and the expenses; it details specific income and expense items en route to the total net income of a business firm. The basic equation on which an income statement is based is:

Revenues – Expenses = Net Income

Retained Earnings Statement

A Retained Earnings Statement indicates how much of previous income was distributed to you and the other owners of your business in the form of dividends, and how much was retained in the business to allow for future growth, this statement explains the change in the retained earnings account and in dividends over a period of time. Retained earnings are the amount of income left in the company after dividends are paid; retained earnings are normally re-invested in the business.

Statement of Cash Flows

The Statement of Cash Flows shows where your business obtained cash during a period of time and how that cash was used, the statement of cash flows may be similar to the income statement but they are completely different. The Statement of Cash does not include the noncash revenues and expenses that are included in the income statement. Companies have shown profits on the income statement but have stumbled later because of insufficient cash flows.

Financial Statements that serve a purpose for Managers and Employees

Financial statements are useful to internal users such as managers and employees, Managers use statements to plan ahead and set goals for the upcoming quarter or year because the statements determine how much money can be spent by the department manager, managers also use the financial statements