Essay on Financial Statements

Financial Statement Differentiation
ACC 561
August 6, 2012
Jared D. Jones, CPA

Abstract This paper will introduce the four types of financial statements needed in the business world today. The individual financial statements have certain information within them and I will give details of what is necessary to complete each financial statement. I will provide information of why investors, creditors, and managers use these forms in their everyday decision-making and what they are looking for within the financial documents and why.

There are four different financial statements applied in the business world today. The four statements are the balance sheet, income statement, cash flow statement, and stockholders’ equity. Each of these financial statements interacts with one another in some way. Changes to one financial statement affect the other three financial statements. The first financial statement is the balance sheet. Within the balance sheet a company reports what it owns and what it owes. The fundamental accounting model is Assets = Liabilities + Stockholders’ Equity. The assets are what a company owns. The balance sheet lists current assets such as cash, accounts receivable, notes receivable, inventory, and any prepaid expenses. The fixed assets would include the land, building, and equipment. The liabilities are what a company owes for. Such as current liabilities like accounts payable, notes payable, and wage payable. The long-term liabilities include mortgage and bonds payable. The net worth of the company is the stockholders’ equity. The net worth is the money that is left after all assets were sold and liabilities were paid. The remaining money is what is called capital or net worth of the company, which belongs to the stockholders’ or owners of the company. The resources of a business is reported on the balance sheet and is useful to the managers, investors, creditors, and owners. The balance sheet shows a true picture of what the company owns and owes and if the company is successful or not. This form can help with decision making for the investor, creditors, owners, and managers. The income statement shows the present company’s operations, such as expenses and cost that occurred during a period of time. This form shows how much revenue the company made during a period of time. The equation for this form is Net Income = Revenue – Expenses. This form is to show the company’s net earnings or losses within a period of time. This statement is interesting to the managers of the company to determine if a product or service is increasing or decreasing profits for the company. If there is a loss the company would consider not producing the product. Investors are interested in this form to verify that the company is making money for them, which is paid through dividends. Creditors would use this form to determine if the company is eligible for a loan or if they are a risky business that will not show any profits. The third form is the Cash Flow Statement. This form shows the source of money and the use of the company’s money being spent. This form is needed for the determination if the bills can be paid and buy other assets if needed. This form informs the managers, investors, and creditors of the company’s profits or loss and if it generates cash. This form shows the operating activity, investing activity, and financing activities through the period of time. The information for this form comes from the balance sheet and the income

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