The Four basic
financial statements
The
Financial Statements signify a recognized record of financial activities of an
article. These are printed information that quantifies the financial power, liquidity
and performance of a company. Financial Statements reveal the financial special
effects of trade transactions and proceedings on the entity. The four most
important types of Financial Statements include:
1) Balance sheet (Statement of financial
position)
2) Profit and loss statement (Income
statement)
3) Statement of retained earnings (Statement
of changes in Equity)
4) Cash flows Statement
Balance sheet
This
statement, presents the financial situation of organization in a given period
of time. The statement regarding the financial situation comprises the
following key components (Gaspar, 2006).
Assets: Referring to
the financial possessions owned by an organization including inventory, cash,
plant, and machinery.
Liabilities:
Liabilities refers to the organizations’ obligations i.e. what it owes others.
This includes bank loans and creditors (Gaspar, 2006).
Equity: Referring what
the commerce owes to its owners. It indicates the total capital that remains in
business after its assets are used to compensate outstanding liabilities
Statement of retained
earnings:
It
details the progress in owners' equity over time. The progress in owners'
equity is originated from the following apparatus: Net Profit or loss through
the time as reported in the statement, dividend payments, gains or losses
acknowledged straight in equity.
Profit and loss
statement:
According
to Gaspar (2006), this statement reports the organization’s financial
performance over a given period in terms of net profit or loss. It contains the
following elements:
Income: the
Company’s earnings at a given period.
Expense: The
organizational cost over a given period.
Cash flow statement:
The cash flow statement indicates the
movement in both cash and bank balances over a given period. The cash flow
movement categorized into the following parts (Gaspar, 2006).
Operating
activities: Showing the cash flow from the major activities of an organization.
Financing
Activities: Showing cash flow obtained or spent on the raising as well as
repaying the share capital and liability jointly with the imbursement of
dividends, as well as profit
Investing
actions: Shows cash flow from both the buy and the sale of possessions other
than inventories (Fridson & Alvarez, 2011)
The Purpose of each
financial statement
The
statement of financial position: Through the analysis of the statement of the
financial position, it enables the determination of the business’s current
financial health (Gaspar, 2006). It shows the summation of the economic
resources, the owners’ capital as well as the obligations for a given period.
The financial position also indicates how the business uses the economic
resources contributed by shareholders and other lenders.
Statements of Changes in Equity:
The main purpose of the statement of changes in Equity is to give a summary of
the activity intake equity accounts for a given period.
Income statement:
Bachert (2012) argues that the purpose of the income statements is to give an
explanation to the investors as well as managers on whether the organization
was profitable in the period the income statement is reported. This is because
the income statement report shows the organization’s revenue and expenses for a
given period whereby it provides a foundation for decision-making.
The Cash flow statement:
The purpose of the cash flow statement is to give information regarding the
gross receipts and gross payments of the organization at a given period
(Bachert, 2012).
Internal users of the
financial statements
The
internal user of the financial statement refers to the people having a direct
bearing to the firm.
The managers and
the owners: According to Bachert (2012), the owners and managers need the
financial reports so that to make the important business decision, for the
smooth operation of the company. Financial analysis is done using the
information from the financial statements so that to give a more comprehensive
view of the organizations’ financial position. In understanding the amount of
long term capital that need to be raised, a variable of the financial statement
such as the ratio of current debt to equity is extremely critical. Other
companies’ financial statements also give solutions of investment to different
organizations. The financial statements of other organizations also give an
appropriate guideline in the event when it is difficult to make a decision
regarding the right field to channel financial resources.
Employees: The
employees use the organizations’ financial statements to make collective
bargaining agreements. These statements can be used by the employees to discuss
issues such as the promotion, increase in salary and rankings (Bachert, 2012).
The external users of
the financial statements
The
external users of the financial statements include the following:
The creditors:
The creditors use the financial statements to determine the company’s credit
worthiness. The creditors set terms of credit in accordance with the assessment
of the financial statements. The company’s creditors include the lenders and
suppliers (Fridson & Alvarez, 2011).
Tax authorities:
Tax authorities use the financial statements to determine the credibility of
returns of tax filed on behalf of the organization.
Investors: The
investors use the financial information so that to understand the feasibility
of investing in the organization.
Customers: To
understand the financial position of its suppliers to enable them to maintain a
steady source of supply in the future.
Regulatory
bodies: The regulatory bodies ensure that the organization’s disclosure of the
financial statements is in agreement with the set rules and regulations so that
stakeholders’ interest is protected since they make decisions based on such
information (Fridson & Alvarez, 2011).
References
Bachert, K.
(2012). Fair Value Accounting Implications for Users of Financial Statements.
Frankfurt: Peter Lang, International Verlag der Wissenschaften.
Gaspar, J. E.
(2006). Introduction to business. Boston, MA: Houghton Mifflin Co
Fridson, M. S.,
Alvarez, F. (2011). Financial statement analysis: A practitioner's guide,
fourth edition. Hoboken, N.J: John Wiley & Sons.
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