Running head: Financial Statements 1

Financial Statements April McGlinchy, Timothy Kirk Sr, Roy Dockery, Lucas Knadle, Angelique Santiago, Nicholas DiGiorgio University of Phoenix ACC 563 Professor - Linda Moore September 2011

Financial Statements

Introduction There are four main financial statements that communicate the financial and operational performance of a company. Investors, managers, and creditors use the statements to determine the health of a company and its potential growth. At the turn of the millennium financial statements came under great scrutiny due to the unethical financial reporting of several large corporations, so now the demand and independence of external users of this information has increased (Wiley, 2009). Accurate financial information is the best representation of how a company performs in different economic conditions, so its the most important information they can provide. These statements will be discussed: income statement, statement of cash flows, balance sheet, and the retained earnings statement. Income Statements The income statement uses a specified period of time to display operational success or failure (Wiley, 2009). The income statement uses a companys revenues and expenses to give a general picture of resource utilization, efficiency, and profitability. Using empirical data from income statements can help managers prepare for seasonal lulls in output, or increased needs for productivity. Income statements are very helpful to managers because it allows them to see how their unit is operating with regard to expenses and revenue. The income statement is less reflective of the overall performance of the company but it can help plan labor demand, and necessary resource allocation. Statement of Cash Flows The Statement of Cash Flows provides a financial outline and information about the cash transactions of an organization for a specific period of time. (Kimmel, Weygandt, &
2

Financial Statements

Kieso,2009). An organization's operating expenses, investments, and financing activities help investors and creditors make analysis and can look into an organization's current standing and help forecast the organization's future cash flows. Key questions like, where cash generated during a specific period of time, how was the cash utilized, and what are the cash balances during a specific period of time, are answered from a Statement of Cash Flows. (Kimmel, Weygandt, & Kieso, 2009). Balance Sheet The Balance Sheet provides stakeholders a snapshot of the assets and claims of the organization at a specific time period. The claims to the assets of an organization are subdivided into claims of creditors and claims of owners (Kimmel, Weygandt, & Kieso, 2009). Those should add up to the amount of assets owned by the organization. It is designed to enable creditors an insight to the company's financial position to determine if the company has the capital available to pay back their debt (Kimmel, Weygandt, & Kieso, 2009). The basic accounting equation is based off of this idea: Assets = Liabilities + Stockholder's Equity. Managers utilize the balance sheet to determine if the proper amount of cash is available and to determine the proper balance between debt and equity financing. Retained Earnings Statement A Retained Earnings Statement is extremely useful to external stakeholders. Retained Earnings is an equity account showing the accumulation of net income and/or net loss over time. The account is a summary of the amount of money that has been reinvested back into the business. Its purpose is to provide information on the changes in the equity accounts over the period of time the statement covers. Elements of the statement include the starting retained earnings
3

Financial Statements

balance, net income (loss), the amount of dividends paid, and the ending retained earnings balance (Kimmel, Weygandt, & Kieso, 2009). Investors can use this statement to determine if the business pays out high dividends or if it is regularly reinvesting its earnings back into the company. Internal users, such as employees, have the opportunity to review the companys growth and how it is using its funds to reinvest back into the company. Conclusion The information in a financial statement(s) is beneficial because it displays a visual look at the financial condition of a business at a specified moment or period in time. There are four primary reports in the makeup of these documents, which makes each one special to those parties interested. Each ones use and purpose can provide the measuring rod that displays the distinct financial aspects of the business. Depending on the requirements of measurement for expansion or growth outlook, the statements draw a picture for those that work inside the company and those that do not but are interested from the outside.

Financial Statements

References Kimmel, P., Weygandt, J., & Kieso, D. (2009). Accounting tools for business decision making. John Wiley & Sons. Wiley, J. (2009). Communicating with Users. Retrieved September 20, 2011, from WileyPlus: http://edugen.wiley.com/edugen/student/main.uni