September 30, 2013
Financial statements are key components to a successful business. It is important that a business keep great financial records. Doing so can make or break any company. If a business wants to be successful and profitable, their records need to be up to date and error free. A business should do audits to ensure that every T is crossed and I dotted. There are four basic financial statements. The four financial statements are: 1. balance sheet, 2. income statement, 3. retained earnings statements, and 4. statement cash flows. The purpose of the first financial statement balance sheet shows a “snap shot” or picture at a certain point and time of what the business owes. It also shows what the business owner owns. Example any assets and liabilities and ownership equity. Creditors can look at the businesses balance sheet to see how much liabilities they have. This will help the creditors decide whether or not they will approve the loan. The second financial statement is income statements. Income statements shows how good or bad the business owner is doing at a period in time for revenues and expenses. Income statements are also referred to as “profit and loss statements,” or “P&L”. Investors and managers use income statements to look at the reported loss or profit. The third financial statement is retained earnings statement. This statement show dividends and how much you retained for growth, and how much was distributed out to owners. Also the retained earnings statement shows the explanation of owner’s equity. This also shows on the balance sheet as “owner’s equity=assets-liabilities.” The fourth and final financial statement, statement cash flows. Statement of cash flows shows changes on the balance sheet and how they affect money and money flows. Creditors and lenders look at the cash flow statement to see if businesses will be able to repay the creditor back. Investors are looking at the case flow statement to see how financially sound a company is.
No matter if an employee, creditor, debtor or investors want to inquire and look at a business’s financial records each statement will provide what they are looking for. If an investor wants to invest they may look at all four of the businesses financial statements. An investor is looking for how much are they going to get from a return, and also how much their stock is going for. If they see a major return on their investment and the shares they purchased cost the same amount as when they first purchased them. The investors will want to purchase more shares. If a creditor is looking at financial statements they are looking to see the ability to pay back the loan. Managers use financial statements to help with day to day operations. It helps them organize and plan daily tasks. Profit margins, cost of materials, new employees, uniforms,