FINANCIAL STATEMENTS

Financial Statements

Financial Statements

A company's financial statements are a necessary source of information for a large variety of users. There are four types of financial statements: the balance sheet, the income statement, the retained earnings statement, and the statement of cash flows.

A balance sheet is a detailed statement of a company's assets (what a company owns) and claims against the company (liabilities and stockholders' equity) on a specific date. Liabilities are what a company owes, and stockholders' equity is claims of owners against the company. A balance sheet basically shows that a company's assets must equal the claims against the company.

The income statement shows a company's revenues and expenses for a specific period. The income statement provides uses with the company's net income which can show investors information about the company's future income. The income statement list the company's revenues followed by the company's expenses. The difference between revenues and expenses is the company's net income.

The retained earning statement reports the changes in a business's retained earnings (the company's net income) over a specific time period (the same time period as the income statement). The retained earnings statement uses information from the income statement (net income) and provides information for the balance sheet.

A company's statement of cash flows shows the cash the business generated and used during the period indicated. The statement of cash flows organizes cash generated into categories: operating activities, investing activities and financing activities.

Comparative statements allow a company to compare financial statements covering several different periods to show the business's performance. A company uses the financial statements to make future business decisions. A balance sheet shows the company's assets against the liabilities and stockholders' equity. This statement is used to figure out the chance of repayment to creditors. The income statement shows a company's profit or loss over time. This statement is used to show investors information about the company's future projected income. The retained earnings statement shows the company's retained earnings over a specific period. This statement can be used to determine dividends paid during the accounting period. The statement of cash flows explains the changes in the cash balance of the business which shows users what is happening with the company's cash.

Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users” (Kimmel, Weygandt & Kieso, 2005). The four basic financial statements in accounting will be identified. Along with the identification of the basic financial statements this paper will show how the statements are interrelated with each other. The statements are useful to the managers, investors, creditors and employees.

Kimmel, Weygandt and Kieso (2005) state the four basic financial statements are income statement, retained income statement, balance sheet and statement of cash flow. The income statement represents the revenues, expenses and the resulting net income. The retained income statement summarizes the changes in retained earnings for the specific period of time. The balance sheet reports the assets, liabilities and stockholder's equity of the ...