Financial Statements and Their Purpose

Financial Statements and their Purpose

The four financial statements that are used in business for accounting purposes are income statements, retained earning statements, Balance sheets, and statements of cash flow. These forms are all used in one way or another as a form of interaction between owners, partners, and users of a business. They all in their own respective fashion model the welfare of a business, and it's likelihood to achieve financial success or failure.

Purpose of the statements

The four statements all are a reflection on the well being of a business, and the manner with which it is being operated. The income statement is a statement that describes a company's performance for a given amount of time. It is an itemized look at income verse expense that gives a bottom line look net income or loss.

The retained earnings statement shows a breakdown of earnings held by a business at a given time. The net income for the period is added to the current earning balance of the company and then the dividends paid out to share holders are subtracted from the total to give the current level of earnings of the organization. This will give you an idea of the actual cash value of a business, and a trend of dividends paid to stockholders if there is any.

A balance sheet covers not only the cash held by a business but also all of its assets and compares them to its liabilities. This type of statement will give an individual overview as to the overall health of the company. By listing all a companies assets to it's liabilities one would be able to gain great insight in the business ability to repay its debt or cover its losses by selling off assets.

As a potential investor you would find the statement of cash flow as a reliable tool to show you a pattern of cash flow for the business you are researching. This statement shows all the income and payments of cash from a business during a given time. It will let you know where and when a business receives its cash (or doesn't receive it).

Managers prospective

As a manager these statements can be helpful in ensuring the proper operation of your business. It will help you see trends in losses and gains that you could then trace back to changes in business practice. For example, did a change in production method cause a larger operation cost with added man-hours or materials? Or has the price of material gone up and now you will have to increase product prices to even out your net income. They can also give a manager an idea if they are ready to expand the company or not, do you have the resources available for more employees, buildings, and equipment. Without the use of these statements managers would simply be making guesses as to the appropriate direction their business needs to be headed.

Investor outlook

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