Financial Statement Differentiation Essay

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Financial Statement Differentiation Bill Bartlett ACC/561 May 7, 2013 William Montgomery Financial Statement Differentiation In accounting there are four different types of financial statements that play an important role in demonstrating the financial condition of a company. Management, creditors, and investors use the statements to make key business decisions. The four types of financial statements are the balance sheet, income statement, statement of equity, and statement of cash flows. The balance sheet shows the assets, liabilities, and equity balances at a given point but does not show the flows into and out of the accounts during the period (Securities and Exchange Commission, 2005). The income statement shows the revenue a company earned over a specific period and shows the expenses associated with generating the revenue. The statements bottom line will show net income or losses over the period. The statement of cash flows shows the cash inflows and outflows for a specified period. The bottom line of the statement of cash flows shows the net increase or decrease in cash. The statement of retained earnings shows the amounts and causes of changes in retained earnings during the period. The retained earnings statement can be monitored to evaluate dividend payment practices (Kimmel, Weygandt, & Kieso, 2009) . Investors Investors will be most interested in the income statement because it shows the income earned by the company and expenditures over a certain period of time. Past net income is useful information in predicting future net income. A competent investor will also be interested in the company’s balance sheet because it allows a ratio analysis that can help an analyst evaluate the financial health of the company. It is critical for investors to understand how much debt companies have and how the debt compares with company’s ability to pay. This requires examining both the balance sheet and income statement. Creditors Creditors will be most interested in the statement of cash flows because it shows the company’s detailed cash position at the moment, is essential in determining the ability of the business to pay its short-term debt, and demonstrates the true liquidity of a company. The statement of cash flows simplifies a creditor’s research because it shows the company’s true cash position. Creditors will also be interested in the balance sheet because it allows them to evaluate the financial health of the company and evaluate the company’s ability to meet its obligations currently and after considering new debt. Although a company may appear profitable on the income statement, they may be cash-poor, because of poor collections on its receivables. There is a strong relationship between the statements of cash flows and the balance sheet (Johnson, 2013). Management Management
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