Financial_Statements_Paper

Financial Statements Paper ACC/290 Financial Statements Paper Medical doctors have various gadgets and apparatus to help them determine the health condition of their patients. Doctors use thermometers, stethoscopes, and high blood pressure machines to deduce whether a patient is sick or healthy. There are times when perfectly healthy looking individuals are diagnosed with diseases with the help of these instruments to save their lives. Financial reports perform the same function for companies and corporations. Misrepresentations of financial statements by organizations like Enron have had negative consequences on the U.S economy in recent years. The operating activities and how they make money and repay their debt is reflected in financial statements. The data from financial statement are relevant to internal users such as, accounting managers and employees, and to external users such as investors and creditors. The primary purpose of the financial statements is to list the assets, liabilities, expenses, and revenues of a company. “Assets are the resources owned by a business. Liabilities are amounts owed to creditors in the form of debt and other obligations. Expenses are the cost of assets consumed or services used in the process of generating revenue. Revenue is the increase in assets resulting from the sale of a product or service in the normal course of business. The four basic financial statements are the balance sheet, income statement, retained earnings statement, and the statement of cash flow” (Kimmel, Weygandt, & Keiso, , 2009). Each of these statements has a significant role in the determination of the company’s financial standing. “The balance sheet provides the user with data about available resources as well as the claims to those resources” (Best, 2012). It presents a picture of what a company owns and its overall liquidity. The balance sheet uses the formula, Assets = Liabilities + Shareholders' Equity. Companies pay for their assets either by borrowing money, which is a liability or obtain money from shareholders called shareholder’ equity. The balance sheet is also used to evaluate the relationship between debt and stockholders’ equity to determine if the company has an acceptable proportion of debt and common stock resources. “The income statement provides the user with data about the profitability of the enterprise detailing sources of revenue and the expenses that reduce profit” (Best, 2012). Income statements explain how the company performed during a particular time showing a success or a failure by outlining the revenues followed by its expenses. The company’s performance is determined by a rundown on how the company incurs its income and expenses through both regular business operations and non-regular business operations. The Income statement will show a net profit or loss incurred over a specific time frame. “Retained earnings statement indicates the previous income that was distributed to owners in the form of dividends and how much was retained in the business to provide future growth by showing the amounts and reason for changes in retained earnings for a particular time” (Kimmel, Weygandt, & Keiso, , 2009). The retained earnings statement shows the beginning and ending retained earnings for the period. The beginning retained earnings amount appears on the first line of the statement. Then the company adds net income and deducts dividends to decide the retained earnings at the end of the period. “The statement of cash flow shows how cash was received and how it was used during a particular time to affect the operating, investing, and financing activities of the company” (Kimmel, Weygandt, & Keiso, , 2009). It provides information on assets that can easily be converted into cash in crisis situations to ensure there is enough money on hand to pay bills and other debts. It also states the company’s ability to change the pattern of income and expenses to deal with future consequences. This statement is important because it shows the company where the cash came from, how it was used, and what changed the cash balance during the reporting period. Financial statements are used by internal users like managers and employees to obtain data used for future budgetary concerns. A comparison is made between the previous and present period’s revenue and expenses to predict the company’s future. The financial statement would be useful to make decisions regarding finances in a future time based on prediction. Internal users can set goals using financial statements to make the company better. The expenses obtained from the income statements can be used to show internal users where cutbacks need to be. Internal users rely on financial statements to direct their company or organization in their daily activities. External users like investors and creditors use information they receive from financial statements to make decisions to lend, buy, sell, or hold money. Investors use the information on potential income so that they know when to buy and sell stock from the company. The creditors use the income statements to predict the company’s future. Creditors need to make sure that the company will be able to pay back money that was borrowed. The retained earnings statement is useful to investors and creditors also. When the investors monitor the retained earnings statements they will be aware of the business’s dividend practices (Kimmel, Weygandt, & Keiso, , 2009). Monitoring these statements allows the investors to make decisions on whether or not to invest. Creditors also find the balance sheet useful as well. It shows creditors the ability of the company to repay debts by evaluating its assets and other liabilities and what can be liquefied for cash. Information generated from financial statements acts like a barometer for the organization and allows achievements and losses to be measured against rivals and competitors to produce a clear picture of where a firm stands in its particular field. It allows people to measure the profitability and value of a business to see how well or how poorly the company is doing. It also helps when attempting to compile a company report for prospective buyers or investors, who wish to see a full and detailed account before becoming involved. Financial statements are intended to be understandable by readers who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently. References: Kimmel, P. D., Weygandt, J. J., & Keiso, D. E. (2009). Financial Accounting Tools for Business Decision Making. Retrieved from The University of Phoenix eBook Collection database.. Best, B. (2012). Uses of Financial Statements. Retrieved from http://www.benbest.com/business/finance.html