Four Basic Financial Statements
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Prepare a 700-1,050-word paper in which you identify the four basic financial statements. Be sure to discuss how they are interrelated with each other, and why they are useful to managers, investors, creditors, and employees.
The four basic financial statements a company can produce are the Income Statement, Retained Earnings, Balance Sheet and Statement of Cash Flows. All these statements are prepared for a specific period in time, usually on a monthly, quarterly or annual basis.
The Income Statement summarizes the fees earned, less any operating expenses to show if the company is profitable. The Income Statement uses the matching concept, which means the expenses are matched with the revenue generated in the same time period as the expenses. If the fees earned are greater than the operating expenses, then the company has generated a net profit. If the expenses are greater than the fees earned, then the company has a net loss. The Retained Earnings shows the changes in the retained earnings. The Balance Sheet displays the companys assets, liabilities and the owners equity. The equation for the balance sheet to equal (balance) is asset = liabilities + OE. The Statement of Cash Flows consists of three sections, cash flow from operating activities, cash flows from investing activities, and cash flows from financing activities. Each of these statements uses information from each other. The Retained Earnings statement uses the net income from the Income Statement. The Balance Sheet uses the retained earnings ending balance. The Statement of Cash Flow ties out to the ending balance of Cash in the Balance Sheet.
Any corporation or individual that has any financial ties to a company would use this information. Managers would use the information in order to make sound business decisions on budgeting, investing profits or to reduce or expand their operating resources. If the company is publicly traded the mangers or executives would make sure that the rules of GAAP have been followed before publishing the financials to the public. Investors would use this information if they are interested in becoming a shareholder in the company, or