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Every person is directly or indirectly affected by personal finances. Finances for business are much more complex than individual finances, but some of the same goals and objectives apply. As individuals, we want more funds coming in than going out, to affect our bottom line income, cash flow, and debt. Businesses also want to make fore sales (funds coming in) than have more expenditures (funds going out). Personal finances adhere to basic accounting principles where transactions stand on their own merit. “Accounting values are established primarily by actual transactions, and income that is gained or lost during a given period is a function of verifiable transactions.” (Block, Hirt, 2004, p.27) For businesses, the finanancial status of the firm takes more variables into consideration, such as equipment, ownership, loan notes, and expected funds. To the economist, items not valued by money transfer can affect the value of the firm. For instance, “a new airport being built on adjacent property is an increase in the real worth of the firm and therefore represents incomeÐ The elimination of a competitor might also increase the firms real worthÐ….” (Block, Hirt, 204, p.27) Overall, financial status concerns a host of variables that may not be considered in accounting theory but nonetheless affects the firms value and the firms health.
Different audiences have different interest in various financial statements and managerial reports. Investors are more interested in profitability, trade creditors pay more attention to debt obligations, bondholders may be influenced by debt to total assets, and the marketing manager may be more concerned with inventory turnover. (Block, Hirt, 2004) Financial statements are prepared to show the economic health of a firm. The three basic types of financial statements are used to translate income, cash flow, and debt to owners, investors, shareholders, stockholders, bondholders, stakeholders, and creditors. Each of these audiences lends strength to the firms structure, based upon their role. The income statement is the first type that measures profitability over a specific period of time. Next, the balance sheet shows what the firm owns, its financial liabilities, and ownership interest. Finally, the statement of cash flow show available money into the firms operations. (Block, Hirt, 2004)
Financial statements not only give an overview to different audiences concerning the overall health of a firm, but also give owners and managers a chance to assess possible directions and solutions, for