April 14, 2014, 2014
Financial statements are documents that are vital to every business. Each audience is looking for different information from them. This could range from seeing how well a company is doing to whether or not a business will be able to pay a creditor back. The statements can be created monthly, quarterly or yearly. Some companies even generate financial statement to cover several years. There are four types of financial statements. They are income statements, statement of cash flow, balance sheets, and retained earnings statements. An income statement lists the total revenues minus the expenses. This equals the total net income for the reported period. Creditors use the information from this statement to see a trend in the income. This information helps make the decision if the business is a good risk lending money to. Investors use this information to see if the company looks successful. If the business is successful then buying stock into the business is beneficial to them. Employees and managers want to see this information to know if they are reaching their goals. They also want to know if the business is successful enough to determine job security. The results of the income statement roll over to the retained earnings statement. This statement shows the dividends paid and how much is remaining in the earnings. The report states the amount of retained earnings at the beginning of the reporting period to the end. The net income is either added or subtracted depending on if the net income was positive or negative. These earnings can be used to expand the business. Creditors want to know this information because the higher the company pays in dividends the fewer amounts the company will pay towards the debts. Investors look at this statement to see a trend in the payouts to the investors. The last line in the retained earnings statement is listed under the stockholder's equity area of the balance sheet. "For every action there is an opposite and equal reaction"(The Physics Classroom, 2014). Newton's third law of motion is a perfect explanation for balance sheets. Balance sheets use the equation that assets equal liabilities plus stockholder's equity. For example, the retained earnings not paid out have to have something in the assets to justify the retaining of the earnings instead of just paying it all out to the stockholders. This statement gives detailed information for creditors to look at to see if they have the assets to sell to be able to cover their debts. While the managers use this information to see if the cash on hand is enough to cover cash needs. This statement also shows if there is a good enough balance between stockholder’s equity and debt. The cash part on the balance sheet needs to equal the amount on the cash flow statement. This statement justifies the movement of cash throughout the period reported. The amounts placed in the report shows where money came in from and where it was spent. This statement helps investors and creditors understand the company’s cash position. Better cash position means it is a good risk for investors and creditors. Management uses this statement to track where the company’s money is coming from and where it is going to. Cash flow statements will show all cash flow from operating activities, investing activities, and financing activities. Operating activities totals will be the receipts minus payments. Financing activities will add the common stock issued and the issued notes payable, it will then subtract the payments to dividends. Investing activities will include all the assets purchased such as furniture and company vehicles. These will be subtracted from the other activities. All of these activities combined will give us a net income for that period. It is then added to the cash from the start of the period that will give us the total cash at the end of the period. Financial statements...
References: KIMMEL, P. (2009). Financial Accounting: Tools for Business Decision Making (5th ed.). Hoboken, NJ: John Wiley & Sons.
The Physics Classroom. (2014). Retrieved from http://www.physicsclassroom.com/class/newtlaws/u2l4a.cfm
Please join StudyMode to read the full document