Financial Statement Paper

Financial Statements 1

Financial Statements

ACC 280

Emily Roddy

Financial Statements 2

Introduction

The purpose of this paper is to define accounting, and identify the four basic financial statements. The paper also explains how the different financial statements are interrelated to each other and why they are useful to managers, investors, creditors, and employees.

Accounting

Accounting is a business discipline that allows companies to record, analyze, and retrieve critical financial information that can be used to determine a company's financial status. Its purpose is to help people understand what is going on financially within an organization provide reports and insights needed to make sound financial decisions. Effectively communicating this information is key to the success of every business. This information is reported in the form of four financial statements.

Financial Statements

The four basic financial statements of accounting are the Income Statement, Balance Sheet, Retained Earnings Statement (a.k.a. Statement of Stockholders Equity), and Statement of Cash Flows. The Income statement shows the profitability of the company over a specific period of time. Classifies financial data under two categories revenues and expenses. It represents revenues earned and expenses incurred. (Formula: Revenue-Expenses=Net Income or Net Loss). The Retained Earnings Statement a.k.a. Statement of Stockholder's Equity shows increases and decreases to stockholders equity accounts for a specific period of time. (Formula: Stockholders Equity= Common Stock + Retained Earnings).The Balance Sheet reports financial data under

Financial Statements 3

three categories assets, liabilities, and stockholder's equity. Shows the financial position of the company on a particular date. It shows not only what is owed by the company but also what is owned. (Formula: Assets= Liabilities+ Stockholders Equity (Common Stock + Retained Earnings= Stockholders Equity) or Assets - Liabilities = Stockholders Equity). The Statement of Cash Flows reports the cash receipts and payments for a specific period of time. Where cash comes into the company from, where it has gone out to, and changes in the cash balance for a specific period of time. It is divided into three categories: Operating activities shows revenues received and expenses incurred. Investing activities shows buying and selling of fixed assets and other investments. Financing Activities shows where the company's long term finances generated from. Includes borrowing (long term debt) and issuance of common stock and preferred stock.

Financial Statements Usefulness

Companies around the world view financial statements in order to stay abreast of their company's economic status. Financial statements are imperative to ensure smooth operation and financial stability. A healthy business has no problem handling financial outputs and incoming assets. Financial reporting creates an atmosphere essential for promoting the feeling reliability and trust among investors and creditors. Accurate financial statements are vital to avoid misrepresentation. However, as credit professionals are well aware, numbers can sometimes be manipulated. Thus, it is important to have statements that are audited by an independent accounting