Financial Statements
ACC 290
Financial Statements
There are four basic financial statements that businesses use to record their assets, liabilities, equity, revenue, and expenses. These financial statements are the income statement, balance sheet, statement of cash flow, and retained earnings statement (Kimmel, Weygandt, & Kieso, 2009). Each one of these statements serves its own purpose; the income statement show how successful a business has been during a period of time, it reports the business revenue and expenses (Kimmel, Weygandt, & Kieso, 2009). The balance sheet is used to present a picture at a certain point in time showing what the business assets and liabilities are (Kimmel, Weygandt, & Kieso, 2009). The purpose of the statement of cash flow is to show where a business’s cash was obtained and how the cash is being used during a certain time period (Kimmel, Weygandt, & Kieso, 2009). The retained earnings statement shows the previous income that was distributed to the company’s owner and/or owners in the form of dividends, it also shows how much was retained in the business to allow for future growth (Kimmel, Weygandt, & Kieso, 2009).
All four of the financial statements is useful to either internal users such as managers and employees, or to external users such as investors or creditors. The purpose of the information on these financial statements is to provide input for decision making (Kimmel, Weygandt, & Kieso, 2009). Managers plan, organize, and run a business therefore they must answer many important questions. Some of these questions include, “is cash sufficient to pay dividends to stockholders?” “What price for the product will maximize the company’s net income?” “Can we afford to give our employees pay raises this year?” “Which product line is the most profitable?” and “should any product lines be eliminated?” (Kimmel, Weygandt, & Kieso, 2009). Accounting provides internal reports, projections of income from new sales, and projections of cash needs for the next year (Kimmel, Weygandt, & Kieso, 2009). Internal users use the accounting information found in financial statements to answer all of their questions and make financial decisions that will change and/or benefit the company (Kimmel, Weygandt, & Kieso, 2009).
External users need to answer questions such as, “is our company earning satisfactory income?” “How does our company compare in size and profitability with other companies?” and “will our company be able to pay its debits as they come due? (Kimmel, Weygandt, & Kieso, 2009). External users use accounting information in two different ways; investors use the accounting information to make decisions about when to buy, hold, or sell company stock (Kimmel, Weygandt, & Kieso, 2009). Creditors use the accounting information to evaluate the risks of selling on credit or lending money (Kimmel, Weygandt, & Kieso, 2009).
There are also external users