Financial_Statements

Anne Brown University of Phoenix-MBA program The four different types of financial statements are the income statement, the retained earnings statement, the balance sheet, and the statement of cash flows. All these statements assist managers, investors, and creditors make important business decisions. The income statement reports the revenue and expenses of a company for a specific period of time for example quarterly, semiannually, or yearly. The expenses of the company will be deducted from the company’s revenue to arrive at a net income or net loss. If revenue exceeds expenses there will be a net income. If expenses exceed revenue the company will have a net loss. For example if company A’s revenue for the month ended June 30, 2011 was $ 950,000 and its total expenses for the same period was $750,000 then the company had a net income of $ 200,000 for the period. The retained earnings statement summarizes the changes in retained earnings that have occurred for a specific period of time for example quarterly, semiannually, or yearly. The retained earnings statement is prepared after the income statement because the net income will be added to the opening retained earnings to arrive at an amount which management will use to decide whether to pay dividends or not. The balance sheet reports the assets, liabilities, and stockholders’ equity of a business at a specific date for example end of the year. The assets are the company’s resources. Assets may include plant and machinery, office equipment, cash, and accounts receivable. Liabilities and stockholders’ equity are claims to the company’s resources. Liabilities may include accounts payable, salaries payable, notes payable, and interest payable. Stockholders’ equity may include common stock and amount of retained earnings. The balance sheet has to balance. That means total assets must be equal to total liabilities plus stockholders’ equity. The statement of cash flows provides financial information about the cash receipts and cash payments of a business for a specific period of time for example quarterly or annually. The statement of cash flows analyses the company’s cash position and reports the cash effects of a company’s operating, investing, and financing activities. The company’s operating activities may include receipts from the sale of goods or services, payments to suppliers for goods or services, and payments to employees. Investing activities may include amount paid or received for purchase or sale of an asset for example buildings or equipment, the amount of loans issued to suppliers, and payments related to mergers and acquisitions of the company. Financing activities may include payment of dividends to stockholders or proceeds from issuing debt. Managers compare the amount of cash provided by operating activities with the amount of cash used in investing activities and any deficiency is made up with cash from financing activities. Generally all financial statements will be of interest to the investors, creditors, and managers because they all provide critical financial information that is essential for decision making. The financial statements are also interrelated. For example the balance sheet reflects the amount of retained earnings which is derived from the retained earnings statement. The retained earnings statement depends on the results of the income statement. However, investors will be most interested in the income statement and the statement of retained earnings because the income statement reflects if the company is making profits or not. If the company is not making profit investors will not be willing to invest. Investors will be interested in the retained earnings statement because they would like to know how much the company is paying out as dividends. Creditors will be most interested in the income statement to gain knowledge of the company’s profitability, and will also be interested in the balance sheet so as to determine is the company is relying more on its owners or creditors for its financing. Management will be most interested in the income statement so as to determine if it is making profit and the balance sheet to determine if the company relies primarily on debt or stockholders’ equity to meet its financial obligation.