What are the four basic financial statements? What is the primary purpose of each of the four basic financial statements? In your opinion, which financial statement is the most important?
The first basic financial statement is the balance sheet (B/S). The B/S presents a picture at a point in time of what a business owns and what it owes. The B/S shows the relationship between assets, liabilities, and stockholder’s equity at a particular date. Therefore, A=L +O.E. The second financial statement is the Income Statement (I/S). The I/S or P&L shows how successfully a business performed during a period of time. The I/S summarizes all revenue and expenses for a specified period. If revenues exceed expenses, the result is a net income. If revenues exceed revenue, the result is a net loss. The third financial statement is the Retained Earnings Statement (R.E. Statement). The R.E. Statement indicates how much income was distributed as dividends and how much was retained in the business. It also indicates amount paid out in dividends and amount of net income or net loss for period; it shows changes in R.E.’s balance during period covered by statement, and the time period is the same as that covered by income statement. The fourth financial statement is the Statement of Cash Flows. The cash flows statement shows sources of cash during a period of time and how the cash was used. It reports cash inflows and outflow resulting from financing, investing, and operating activities during the period. Furthermore, it reports the cash effects of a company’s operations for a period of time, shows cash increases and decreases from investing and financing activities, and indicates increase or decrease in cash balance as well as ending balance.
In my personal opinion, the Income Statement (I/S) or P&L is the most important financial statement. One example is because it reflects gross sales, COGS and expenses. Also, it illustrates the company’s net profit or loss from its operations.
I find your information helpful. In addition to the information you reflected I am reminded about one important aspect of the Balance Sheet regarding its equation: A = L+O.E.
When working with this particular financial statement, especially if you are the accountant publishing the financial statements for a company, you should always pay special attention that this particular equation applies to the B/S.
The aid of accounting software has made it easier to publish financial statements. However, because it can be easy to make a mistake, sometimes the use of incorrect accounts may cause the B/S to be out of balance. Therefore, keeping a constant eye on this particular financial statement is very important. Especially, when you have several individuals working on the accounting like A/R and A/P and make journal entries to offset some of the accounts that affect your financials.
Good point of view Dedra.
The B/S is one of the most important financial statements. For example, the B/S gives you a lot of information. For example, it tells you how much in assets you have that are in the form of cash or can be converted to cash within a short period of time of less than one year called current assets and assets that can be converted to cash in a period longer than one year called long-term assets. One important aspect of the current assets is the bank reconciliation. Also, for the A/R department would be the accounts receivable. Keeping a constant control of A/R aging report is of outmost important for companies that sell on credit. Many companies or individuals purchasing your products or services may lose or misplace your invoices or even take a longer period than the net period given to pay and they will need the reminder that a particular invoice is outstanding or past due. For example, a company that sells on credit may be able to produce a lot of revenue but it can fall into problems if their customers are taking