Running head: FINANCIAL STATEMENTS PAPER 1

Financial Statements Paper

James F Tinsley
ACC290
December 13, 2011
TAYLOR SEARLE
FINANCIAL STATEMENTS PAPER 2


Financial Statements Paper
Financial statements is a more common term used to refer to statements produced at the
end of the accounting periods, such as the income statement, balance sheet, cash flow statement
and the statement of owners equity. These four financial statements are sometimes known as the
final accounts, which the business prepares.
The income statement also known as the trading and profit and loss account is a
financial statement, which helps to calculate the gross profit and the net profit of the company
for a particular year. Most of the businesses prepare the income statement because they compare
revenues with expenses and check the performance. If the revenue exceeds the expenses, the
business has earned a profit and vice versa. The information contained in the income statement is
not only, but also useful for the internal users of the business such as the managers and owners
but however it is also useful for the external users such as government, investors and creditors.
For internal users, income statement helps to check the performance and profitability of
the business. Owners invest their money merely to earn profits and thus it is necessary for them
to check the amount of money they have earned in an accounting period. Similarly, managers
status is directly linked with the profitability of the business. If the organization has able to
achieve higher profits, managers salary and status often increases. Moreover, income statements
also help to check the revenues and expenses of the business and thus managers can decrease
their unnecessary expenses to earn more profits. In the same way, making of income statements
is also useful for the external users such as investors, creditors and the government. Investors
usually check the income statements of the organization to check the past financial performance
of the business and to assess the capability of generating future cash flows. Moreover, creditors
also take the help of the income statement to check whether the business has enough revenue to
FINANCIAL STATEMENTS PAPER 3


pay its dues on time. Finally, the government needs to check in order to calculate the taxes which
the firm has to pay with respect to the profits earned over time.
The balance sheet is another financial statement which shows the assets, liabilities and
the capital of the business. This document is prepared at the end of the accounting period, and it
helps to check the liquidity position and the current health of the organization. It is based on an
accounting model (e.g., assets = capital + liabilities). Internal users, such as managers and
owners take the help of the balance sheet to check the liquidity of the business. This document
helps managers to manage assets and liabilities so that enough working capital can be made
available in an accounting period. By seeing the inventory levels, account payables and account
receivables, the managers can change the policies and can reduce the inventory levels. In the
same way, external users such as investors and creditors do check the balance sheet to assess risk
and collateral issues. The investor would not be reluctant to invest in the business that has high
liquidity and gearing ratio. This means the business that has the problem of managing working
capital is usually considered a highly solvent business.
The cash flow statement is the third financial statement, which lists the cash flows of a
business over a period of time, usually the same period as is covered by the income statement. It
helps the business to check its cash inflows and outflows and to see whether the business has
cash surplus or shortage. This financial statement is useful in evaluating a companys ability to
pay its bills on time. Cash is considered as the most liquid asset and business that are short of
cash usually close down. So this tells the value of preparing the statement of cash flows. For
internal users, cash flow statement helps managers to check whether appropriate cash is available
to pay the day-to-day expenses of the business. Workers of the business also use the cash flow
statement to know whether the company will be able to afford compensation. In the same way,
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many external users such as creditors and investors do take the help of the cash flow statement to
assess the liquidity position of the firm. Creditors use this financial document because they want
the clear picture of the companys ability to pay. Similarly, investors need to see the financial
position and to judge whether the business is strong financially.
Finally statement of owners equity also known as statement of retained earnings is the
last financial statement, which the business prepares at the end of the accounting period. This
statement uses the information provided by the income statement and provides information to the
balance sheet. This statement is mostly useful for the owners because they want to see how much
every other owner has invested and thus they want to assess their share in the ownership.
However, this financial statement is not that much useful for the external users but sometimes
investors do see this statement to check out the activities of the original owners.
So to put the details in a nut shell it can be said that making of financial statements is
the top most priority of any organization and firms must make sure that authentic values should
be taken when preparing these statements. All of these four financial statements summarize the
performance, profitability, and the liquidity of the business and thus internal and external are
interested in these statements.



References

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Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business
decision making (6th ed.). Hoboken, NJ: John Wiley & Sons.
Four financial statement. (1999). Retrieved December 13, 2011, from Quick MBA:
http://www.quickmba.com/accounting/fin/statements/
Best, B. (n.d.). Usefulness of Financial statement. Retrieved December 13, 2011, from Benbest
Corporation: http://www.benbest.com/business/finance.html