Financial_Statements

Financial Statements Paper Shakisha Jones ACC/290 September 5, 2011 Gary Foote Financial Statements Paper French is the language of people native to France. Accounting is the language that businesses use to converse financially between other businesses, internally and externally to explain their companies’ financial position to investors, creditors, and outside sources, such as auditors and regulatory agencies. In this paper you will learn understand the definition of accounting, identify the four basic financial statements, explain how these statements are interrelated and why they are important to managers, investors, creditors, and employees. Kimmel, Weygandt, and Kieso (2011) define accounting, “It is an information system that identifies, records, and communicates the economic events of an organization to interested users” (p. 4). Accounting is very important; it explains what is happening financially, at a given point of time to a company. Investors would like to know if the company is operating on a profit, before investing money into the company. For example, if the company is profitable beyond their projected budget, the investor will most likely receive a dividend. Accounting information is important to creditors because a creditor would like to know if the organization applying for credit can pay its bills. External users of accounting information, such as state auditing agencies and governmental regulating agencies want to know that the organization in question is following all the rules. The four basic financial statements are important to internal and external users. The basic accounting equation provides the groundwork for recording a company’s financial events. Assets equal a company’s liabilities plus its stockholders’ equity and the four basic financial statements come from this information. According to Kimmel, Weygandt, and Kieso (2011), “The income statement reports the profitability of the company’s operation over a specific period of time, the retained earnings statement reports the changes in retained earnings for a specific period of time, the balance sheet reports the assets, liabilities, and stockholders’ equity of a company at a specific date, and a statement of cash flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time” (p. 21). The four basic financial statements are connected to each other in some kind of way. The net income from the income statement is added to the beginning balance of the retained earnings statement. The retained earnings at the end of a specific period in time are reported on the balance sheet under stockholders’ equity. The cash listed on the balance sheet is reported on the statement of cash flows. The information found on these four basic financial statements is important to internal and external users. Financial statements are very useful to managers, investors, creditors, and employees. The income statement shows the amount of revenue and expenses a company has incurred over a specific time frame and whether the company is operating at a profit. This information could be important to creditors and banks, it shows the company is operating at a profit and has money to pay its bills. Investors see profits as a chance for dividends, monetary returns on their investments. If employees are privy to this kind of information, they can see that their hard work is paying off and a raise might be coming in the near future. Sales people would love to see an increase in revenue; it tells them that their sales efforts are paying off. The retained earnings statement shows if there is an increase or decrease in profits for a specific period of time, this could be important to investors in terms of receiving a dividend on their investments. The balance sheet can show a potential bank loaning money to a company, how much holdings a company has in terms of assets and how much is owed to creditors. The statement of cash flows can tell the managers the amounts of receipts the company is bringing in and how much the company is paying out for a specific period of time. The cash flow statement can be very important to department heads; they can use this statement to project how much money is needed for a future period by forecasting, using incremental increases from previous periods. Accounting is the language that CPA’s, auditors, and regulatory agencies use to discuss a company’s financial position. The four basic financial statements are very important to a company’s internal employees and well as the company’s external sources, such as creditors, banks, and investors, it gives these users a snapshot for a specific period of time about the financial well being of an organization. For example, according to Victoria Shoaf (2007), “Financial statements provide information of value to company officials as well as to various outsiders, such as investors and lenders of funds. Publicly owned companies are required to periodically publish general purpose financial statements that include a balance sheet, an income statement, and a statement of cash flow” (p. 318). References Shoaf, V. (2007). Financial statements. In Burton S. Kaliski (Ed.), Encyclopedia of Business and Finance (pp. 318-320). Detroit: Macmillan Reference USA. Retrieved from http://go.galegroup.com/ps/i.do'action=interpret&id=GALE|CX1552100137&v=2.1&u=apollo&it=r&p=GVRL&sw=w&authCount=1 Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business decision making (6th ed.). Hoboken, NJ: John Wiley & Sons.