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Date Posted: 04:26:20 12/10/20 Thu
Author: linda1820-ty_ler
Subject: Financial Statements

Identify the Four Basic Financial Statements

The four basic statements that describe the financial situation of a company are the Balance Sheet, the Income Statement, the Cash Flow Statement and the Owner’s Equity Statement. These statements explain the basic flow of finances within the company and whether the company is making profit or loss.

Purposes of Each of the Financial Statements

Income statement

This statement is the easiest one to follow. It gives a list of revenues, expenses as well as losses that are associated with monies that are earned from the ordinary operations within the company. The statement indicates the amount of revenues the company has earned over a specific period of time. It also indicates the costs and expenses, associated with earnings, such as revenue, and shows the net earnings and losses.

Balance sheet

This statement gives a comprehensive report on the company’s assets, owner’s equity, and liabilities. Essentially, the balance sheet represents a snapshot of the company in terms of its assets, liabilities, and owner’s equity usually at the end of a period, more often the financial than the calendar one.

It is set up in a basic accounting format with the left side having assets, and the right side declaring the liabilities and equity. It may also be structured in such a way that assets come at the top, followed by the liabilities and then the shareholder equity at the bottom.

Cash flow Statement

This statement gives a report on the inflows and outflows of cash within the company. It is a statement set within a certain period and shows a net increase or decrease of a company’s finances over that period.

The cash flow statement draws from both the balance sheet and the income statements in an effort to show if the company is generating or losing money. It consists of the three parts: operating, investing and financing activities.

Statement of Owner’s Equity

This statement shows the amount of monies that the shareholders have ploughed into the business. It also indicates the earnings derived from doing business with this capital. Hence, the statement consists of the two categories: the contributed shareholder’s capital and the retained earnings.

How the statements are useful for the managers and employees

Managers use the statements to guide their day-to-day managerial activities; they analyze the statements in order to evaluate the performance of the company.

The income statement provides the managers with the vital information regarding revenues and expenditures. It helps to compare the inflows against the outflows during different financial periods. This, in turn, helps them to identify the possible errors and problems within the system. Hence, it provides them with an opportunity to learn what has caused the changes and to find ways of addressing them .

The balance sheet provides managers with the information on changes in both liabilities and assets in different financial periods. This comparison is useful, as it guides the direction the business is taking in terms of profitability and losses. It helps to determine whether such changes have proven being helpful or destructive to the business.

Employees find such statements useful, because some of them have direct responsibility for the expenses accrued within the company . For this reason they are especially interested in the Income Statement of the company.

Employees also find such statements useful based on the fact that some companies pay bonuses depending on the net income of the company within a financial period. A higher net income, thus, means that the employees will take home a better bank check compared to the low net income in the form of bonuses.

Employees may also find their interest in such statements in terms of being sure of the company’s position in maintaining its duty to pay them. Through such statements, employees get the information on whether the company is able to generate enough income, which is directly correlated to its ability to meet its payroll duties.

How the statements are useful to the investors and creditors

The four basic financial statements provide the investors with the information about the company’s performance. This, in turn, informs them of the returns on the monies, or, speaking the financial language, returns on investments (Duchac et al., 2007) they have brought into the company. Many investors are interested in seeing the stock value of the company increasing, so that they can stick to the shares, which means an increase in the value of their investment.

The investors review the income statement, since it provides the information on the profitability of the company. They also review the statement of owner’s equity in order to observe the changes that may have occurred in the shareholder’s equity.

Creditors are also interested in the statements, since they go a long way in helping them to make a decision on giving a credit line to the company. To the creditor, the income statement indicates how much income the company generates; the balance sheet shows its liabilities compared to equity; and the cash flow statement emphasizes its ability to pay in cash, when financial duties and obligations arise.

Financial statements give a summary of a business transacted in the company, as well as provide information on revenues and expenses within financial periods and give a forecast of the company’s future . These statements, thus, become a pillar to management, forecasting, shareholding and overall future success of the company. They are important in different circles and with different people: managers, shareholders, creditors and employees among others.

In line with the significance of such statements, it is important that a company hires professionals to handle books of accounts . Proper bookkeeping is, thus, imperative for such statements to be meaningful to the people that look at them. Therefore, discipline and due diligence are the most important facets for the proper bookkeeping. Good accounting practices help to develop the companies, while the bad ones simply kill them.
About author
Linda works as an editor at https://essaysservice.com/. She has always enjoyed working with a variety of literature and being interested in new facts. In addition, she easily finds common ground with many people. She also received her master's degree from American University of Washington

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