Financial_Statements_Paper

Financial Statements Paper Since its beginning in 1494, accounting has served the same purpose; to identify, monitor, and report economic activities of an organization. In order to do this, accounting personnel use for basic financial statements; income statements, retained earnings statements, and balance sheet reports. All of these reports are interrelated with each other. These reports are useful for various groups, including management, investors, creditors, and employees. Purpose of Accounting In 1494, Luca Pacioli wrote Summa de Aritmetica, Geometria, Proportione et Proportionalite, in which he describes a system to make sure that all financial data is recorded efficiently and accurately. This system is largely thought to be the origins of accounting as we know it today. The purpose of accounting is that it “identifies, records, and communicates the economic events of an organization to interested users” (Weygandt, 2008, P. 4). The first step of accounting in an organization is to determine which economic events are relevant to its business. This can consist of sales, services provided, wages paid to employees, and more. Economic events within an organization are then recorded in a systematic and chronological system to maintain a history of financial activities. This information recording function of accounting is generally known as bookkeeping. These recorded events are then filtered into different reports, which are used to communicate this information to the interested parties. Correctly analyzing and interpreting economic events is a vital portion of an accountant’s job. Financial Statements Most companies utilize four basic financial statements from the economic activities they identify and record. These statements are income statements, retained earnings statements, balance sheets, and cash flow statements. Each of these reports has a different purpose and function in an organization. An income statement show how much revenue a company has earned over a specific period of time, and the costs and expenses associated with earning that revenue. The retained earnings, or shareholders equity statement is a summary of the money that would be left over if a company sold all of its assets and paid off all of its debt, telling shareholders the financial strength of the company and how much may be die to them as dividends. Balance sheets provide detailed information about a company’s assets and liabilities. It is a snapshot of the general economic health of the company at that given point in time. The cash flow statement keeps track of incoming and outgoing money, based on information from the balance sheet and income statements. It lets the company know their current liquidity. These four statements interrelate with each other and fall into a specific sequence. They start with the income statement, detailing revenues and expenses and finishing with net income, which is needed for the next statement; the retained earnings statement. The retained earnings, which are net income less dividends, are then transferred down to the balance sheet in the liabilities and stockholder’s equity section. The cash that appears on the balance sheet is needed on the last statement in the sequence, the cash flow statement. That total is the amount that the incoming and outgoing cash will total. Users of Accounting Information There are two main groups of people that find the aforementioned reports useful. These are internal and external users. Internal users include any member or group within an organization, and include management, Human Resources, Marketing, and Information Technology. These internal users take the information from the accounting reports and us it to help make decisions topics ranging from pricing for a product to whether or not to upgrade computers and software. External users are those outside of an organization like investors, creditors, and taxing authorities. These users have to make decisions such as whether or not to buy stock, whether or not to lend money, or whether or not a company complies with tax laws. Conclusion The purpose of accounting is to identify, record, and communicate economic events that happen within an organization. Accountants analyze this information and communicate it to interested users through four basic, interrelated reports. Income statements present revenue and expense data. The net income from this statement is useful in determining the outcome of the retained earnings statement. This outcome follows down to the balance sheet as a liability. The cash listed as an asset on the balance sheet then transfers to the cash flow statement. Internal users make use of these reports to make critical internal decisions for the company. External users have to make decisions about whether or not to invest or extend credit. Reference Weygandt, J. J. (2008). Financial accounting (6th ed.). Hoboken, NJ: Wiley & Sons.