Financial Statements
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Financial Statements
In this paper, we will discuss the four basic financial statements, the balance sheet, the income statement, the cash flow statement, and the retained earnings statement. We will also discuss look at the purpose of each of the financial statements. Lastly we will see how the financial statements are useful to internal and external users.
The four basic financial statements are the balance sheet, the income statement, the cash flow statement and the retained earnings statement. The balance sheet reports the assets and claims to assets that a company currently holds. Assets are items that the company owes that have value. Claims that a creditor holds are called liabilities and claims to owners are called stockholders equity. Liabilities are the debts that the company owes to others. The basic accounting equation is ASSETS= LIABILITIES + Stockholders Equity. The purpose of the balance sheet is to show the position of the business the assets must equal the liabilities and the stockholders equity. The income statement is a report of how much revenue a company earns over a specific time period. It also shows the costs and expenses incurred while earning the revenue. In essence it shows the net earnings or losses, telling how much the company has earned or loses over a period of time. The cash flow statement reports the companys cash flow. It shows how much money is coming and going out of the business. The purpose of the income statement is to show how much money the company has gained or lost. The retained earnings statement is a report showing how much income was paid to the owners of the business in the form of dividends and how much was retained in the business to allow for future growth.
Now we will look at how internal users use financial statements. Internal users such as managers and employees use these financial statements in many ways. Managers use them to review the companys performance and make any changes they see fit. Managers will also use the statements to verify whether they have enough supplies or if more are needed. The statements will let a manager know if those new ideas are generating cash flow or costing the company money. Employees can use the information for job security if they company is doing good they are less likely to lose their job or when requesting raises. Employees want to make sure the company will keep them stable and still make a profit to pay salaries and benefits.
There are many different ways that external users use financial statements. External users can use the financial statements to see where a company is to decide whether or not to loan the company money. Financial statements are used to determine a companys creditworthiness by its creditors. Investors use the financial statements to see if investing in the company will getthem a good return on their investment. Other external