In this paper I will identify the four basic financial statements and define them the importance of each financial statement. Also point out the importance and usefulness of each statement to internal and external users such as creditors, investors, managers and employees as well.
The first basic financial statement is the balance sheet and it “presents a picture at a point in time of what a business owns and what it owes”. It is divided into three main parts assets, liabilities, and shareholder equity. It is a scope or a quick glance of all aspects of a business that are useful to internal and external users of this information. It provides assets that the business owns or owes from bank accounts, office equipment, etc. and the company usually put's this under the asset side of the balance sheet. Liabilities are the opposite of assets they include anything that cost the company money like purchasing or costing anything pertaining to the business. As shareholder equity basically tells you the book the value or what is left for the stockholders after all the debt has been paid.
The income statement “shows how successfully a business performed during a period of time.” is a financial statement that measures a company's financial performance over a specific accounting period. It assesses the financial performance by providing a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. Also known as the "profit and loss statement" or "statement of revenue and expense." http://www.investopedia.com/terms/i/incomestatement.asp. Income statement reports the revenue less the expenses of the accounting period.
The cash flow statement “shows sources of cash during a period of time and how the cash was used” it is different from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Not to be confused, as cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit. Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses and credit transactions (appearing on the balance sheet and income statement) resulting from transactions that occur from one period to the next. Statement of ash flow reports inflows of cash during the accounting period in the categories of operating, investing and financing.
The statement of retained earnings “indicates how much income was distributed as dividends and how much was retained in the business”. It reconciles the owners' equity section of successive balance sheets, showing what has happened to generated revenue. Retained earnings can be appropriated for future inventory price decline and later reported as net profit. A financial statement outlining the changes in retained earnings for a specified period. Also, the statement of retained earnings can be known as a statement of owner's equity, equity statement or statement of shareholders' equity. http://www.investopedia.com/terms/s/statement-of-retained-earnings.asp The statement of retained earnings is prepared in accordance with generally accepted accounting principles (GAAP). The statement of retained earnings reconciles the beginning and ending retained earnings for the period, using information such as net income from the other financial statements. This statement can appear as a separate statement or as an inclusion on either a balance sheet or an income statement.
Every financial statement serves an important role in the area of information for external and internal users alike whether it is a sole proprietor ship, partnership or a corporation as this information reflects the past present future