Financial_Statement_Differentiation

Financial Statement Differentiation University of Phoenix Accounting Acc/561 Norsey Dorris June 22, 2012 There are four financial statements that users view to determine the health of companies, which are the balance sheet, income statement, retained earnings statement, and the statement of cash flows. These statements typically represent the backbone of a company and are viewed for various purposes from investment decisions to projected future earnings to credit risks. Each statement serves a purpose and are analyzed differently depending upon the user. Income Statement An income statement reports a business’s revenues and expenses and represents how successful a business has been operating during a specific period of time. Past net income provides information for predicting future net income, which is most beneficial to investors and creditors. Investors will buy and sell stock based on their analysis of a company’s past performance to predict future performance. Creditors also use the income statement to predict future earnings (Kimmel, Weygandt, & Kieso, 2009). A bank would not loan money to a company if they thought that the company would not be profitable enough to repay back the loan. Retained Earnings Statement The retained earnings statement is an indication of how much previous income was distributed in the form of dividends and how much was retained in the business for future growth and expansion of the company. The time period used is the same as the time period covered in the income statement. The retained earnings statement and the income statement are interrelated in that the beginning retained earnings amount appears on the first line of the statement, and then the company adds net income and deducts dividends to determine the retained earnings at the end of the period (Kimmel, Weygandt, & Kieso, 2009). By monitoring the retained earnings statement, investors can view how much or how little dividends are paid out to the shareholders. Some investors will value growth over dividends and others will want to invest for receiving dividends. Balance Sheet The balance sheet represents a business’s assets and liabilities in a period of time. The basic accounting equation to show the relationship is: Assets = Liabilities + Stockholders’ Equity First component to be listed is the assets followed by liabilities and stockholders’ equity. Creditors analyze a company’s balance sheet to determine whether or not that company would have enough assets that can easily be sold to repay its debts. They would also review the relationship between debt and stockholders' equity to see if there is a good balanced amount. Statement of Cash Flows The statement of cash flows shows where a company obtained cash during a period of time, how much cash was used, and the change in the cash balance. Internal and external users analyze this statement because it also represents the cash effects of a company's operating, investing, and financing activities. Besides creditors and investors, management would review frequently the statement of cash flows to determine their company’s investment strategies and progress during given periods of time. For management it would also let them know how much cash is coming in and where is it going and what is it doing for the company overall. References Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2009). Accoutning: Tools fo Business Decision Making (3rd ed.). Hoboken, New Jersey: John Wiley & Sons.