Analyzing and Interpreting Financial Statements
This paper will demonstrate my understanding of financial accounting and why generally accepted accounting principles (GAAP) are important. I will discuss how financial statements are used in the marketplace. I will describe each financial statement and tell what it reveals about the business. I will explain how the statements are linked and show examples. I will explain the notes to the financial statements. I will also explain why ratios are used and why they are important.
| Keiser UniversityDr. Bunney SchmidtACG 501
Financial statements are the output of the accounting cycle. Financial statements are a way to communicate financial information that can be used to make decisions in regards to where the company is heading. Financial statements are a way to help organizations know whether to invest, lend, or grant credit to a company. The stakeholders of a business use financial statement information for planning, and evaluating business activities. The results reported in the financial statement may help companies determine certain decisions from a human resource prospective such as benefits, bonuses, hiring, and downsizing. Financial statements serve as a critical role in organizations because it tells a story of a company’s life cycle. Financial reporting provides information that is useful in making investments for company growth as well as credit decisions. Financial reporting provides material that is valuable in obtaining cash flow projections. Financial reporting provides facts regarding assets of an organization, the claims to those resources, and changes in those resources. There are several questions that financial statements can answer such as is the business profitable, is the operating activities of the business generated sufficient cash flow, and has the business grown since the previous year. This paper will discuss the importance of financial statements and how they are used in the marketplace. The paper will explain all aspects of financial statements in detail and why it is critical to companies to know what information are in these statements to make vital decisions on moving their company to success.
FINANCIAL STATEMENTS IN THE MARKETPLACE
Kramer and Johnson stated, “Companies use several financial statements which are the balance sheet, income statement, the statement of owner’s equity, and the statement of cash flow to total and present financial data to internal and external stakeholders” (Kramer, Johnson, 2009). Berry stated in his book, “the balance sheet presents the assets, liabilities, and residual equity of the owner or owner of a business” (Berry, 2006). Assets are the economic resources. The balance sheet is a picture of the organization which demonstrates the position of the organization at a specific time (Kramer, Johnson, 2009). Assets are economic resources for a business. Assets can be tangible, which is something the company can touch. Assets can also be what they may represent rights the company possesses. Income Statement
Berry stated in his book, “the purpose of the income statement is to compute a company's net profit of loss for a given period, whether a year, a quarter or any other time frame” (Berry, 2006). Berry stated “income statements start by adding total revenues for the period, which includes the capital gains and interest income in addition to sales revenue” (Berry, 2006). Berry stated, “Income statements compute and subtract the cost of goods sold to arrive at the organization's gross profit” (Berry, 2006). Berry stated, “Gross profit signify the profit made on inventory sales and other income over the cost of goods sold, before additional company expenses” (Berry, 2006). Berry stated, “Income statements calculate and subtract additional expenses, including the overhead,...
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