Financial StatementsEssay Preview: Financial StatementsReport this essayThis paper is intended to explain the purpose of the different financial statements all companys use. Financial statements are a vital part of every company and their future. Each statement in its own holds information of a part of the company but put them all together and you can see the whole picture of what the company has done over a certain period of time and, what its financial health is. Managers can use these to judge their inventory, sales, make needed adjustments to ordering. Upper management can use these to see that their managers are doing their jobs and that their product is selling. Investors use these to make their decisions on buying, selling, or holding on their stocks that they own in the company.
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Reporting of this information must be done in a certain way; if a company finds a mistake in previous statements they must report it immediately to avoid any penalties. If the company did not honestly report their statements the information they send out would have no credibility. A companys reputation depends on its accurate and dependable reporting. Effective reporting shows the company has good ethical behavior and can be trusted. This is another item that possible investors and creditors will look at in a companys big picture. If they have been reported for false reporting they will not get the credit or the investment they would have if they had. In 2002 Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future scandals by and company. All companies have to report their financial paperwork in the same manner no matter the size of the company. All statements are reviewed individually and compared to previous documents submitted by the company.
To explain the different statements, and their purpose we are going to start with the first statement, the Income statement. The income statement is a statement that shows a companys income and expenses over a certain period of time. The overall purpose of this statement is to show that companys earnings (or losses) for that period of time. Since the income statement will show the income and expenses of the company it allows a potential investor an insight of how the company manages their money, meaning do they spend too much on expenses or more than their income for that period of time. This will also show managers where they are actually spending their money and what on.
Next we have the balance sheet. The balance sheet lists the total of the assets and liabilities, a picture of the financial position a company has on a certain date of time. Assets are what the company will use to run the business and its liabilities and equity are what support the business. The balance sheet is separated into two columns one side is the assets, and the other is its liabilities and shareholder equity. All assets equal a companys liability and shareholders equity and both of these at the end of