December 12, 2013
There are four basic financial statements. These are income statement, balance sheet, retained earnings statement, and statement of cash flows. A company uses financial statements to make information available about the business to internal and external users such as managers and creditors. Additionally managers and creditors use information on the statements to make important decisions such as making big purchases and lending money to a business.
This statement reports the net income or net loss of a company for a period of time. In the income statement, revenues are listed first, followed by its expenses. Revenues list the amount of money brought in from sales of products and services. Expenses list items that relate to money spent to produce the sales and services such as salaries expense, supplies expense, insurance expense, interest expense, and depreciation expense. The difference between revenues and expenses will determine how well the company did over the period determined at the top of the income statement.
The income statement is useful to managers in determining the amount of the workforce and supplies he or she needs to use, based on past income statements to reach a certain amount of revenue. Lending institutions may also find the information listed in the income statement useful when making a decision to lend money (Rosehill, 2013).
Retained Earnings Statements
The retained earnings statement shows the amount of income earned after dividends are paid. The first line of the statement is the beginning retained earnings, then the company adds the net income and subtracts the dividends to determine the retained earnings for the same period used in the income statement. This statement is most useful to external users of the company. Investors use this statement to monitor a company’s dividend payment practices ((Kimmel, Weygandt, & Kieso, Chapter 1, 2009).
Balance Sheet The balance sheet reports detailed information of a company’s assets, liabilities, and stockholders’ equity. It shows a snapshot of the company’s financial position as of a specific date ((Kimmel, Weygandt, & Kieso, Chapter 1, 2009). A company’s assets equals to the sum of its liabilities and stockholders’ equity. Assets are listed at the top of the statement. Items that a company lists under assets include cash, accounts receivable, prepaid insurance, and office equipment. Liabilities and Stockholders’ equity are listed next. According to “U.S. Securities and Exchange Commission” (2007), “Liabilities are amounts of money a company owes to others” (Balance Sheets). These may include obligations such as money owed to a bank, rent, and payroll. Stockholders’ equity consist of common stock and retained earnings.
Managers find this statement useful when determining if cash on hand is enough for immediate cash needs. By looking at a company’s balance sheet, creditors can determine the likelihood that they will get paid.
Statement of Cash Flows
The statement of cash flows answers important questions about the origin of cash, how it was used, and the change in cash balance during a period of time chosen by the company. Managers may use information on this statement to determine if the company generates enough cash from operating activities to purchase assets and pay its expenses.