Financial Statements Paper Essay

Running Head: FINANCIAL STATEMENTS Financial Statements Paper Ricardo E Mendoza University of Phoenix Principles of Accounting Sandra Hernandez 21 January 2010 Abstract In this paper I will discuss about the definition of accounting and the different financial statements that are use to monitor all the tangibles that flows within a company and how they relate to each other to control the flow of monies on any given business. Financial Statements Paper What is the purpose of accounting?

The purpose of accounting is to provide the information that is needed for sound economic decision making. Businesses use financial and managerial accounting; financial accounting is to provide information about the business to the external parties such as investors, creditors, and tax authorities and is regulated according the Generally Accepted Accounting Principles guidelines. Managerial accounting is use for internal decisions making and doesn’t follow any type of rules issued by standard-setting bodies.

We will write a custom essay sample on
Financial Statements Paper Essay
or any similar topic only for you
Order now

Accounting financial statements are reports that allow interested parties to evaluate the profitability and solvency of a business. These reports include the Balance Sheet, Income Statement, Retained Earnings Statement, and Statement of Cash Flow. These four financial statements are the final product of the accountant’s analysis of the transactions of a business. The balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity. Assets are things that a company owns that have value.

This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are investments a company makes. (Beginners’ Guide to Financial Statements) Liabilities are amounts of money that a company owes to others.

This can include all kinds of obligations, like money borrowed from a bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future. Shareholders’ equity is the amount owners invested in the company’s stock plus or minus the company’s earnings or losses since inception. Sometimes companies distribute earnings, instead of retaining them.

These distributions are called dividends. A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the reporting period. It does not show the flows into and out of the accounts during the period. (Beginners’ Guide to Financial Statements) The next report is the income statement, is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue.

The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period. Income statements also report earnings per share. This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period. Most income statements include a calculation of earnings per share or EPS. This calculation tells you how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period.

To calculate EPS, you take the total net income and divide it by the number of outstanding shares of the company. (Beginners’ Guide to Financial Statements) Retained Earnings Statement are a financial statement that lists a firm’s accumulated retained earnings and net income that has been paid as dividends to stockholders in the current period. It breaks down changes affecting the account, such as profits or losses from operations, dividends paid, and any other items charged or credited to retained earnings.

A retained earnings statement is required by Generally Accepted Accounting Principles (GAAP) whenever comparative balance sheets and income statements are presented. It may appear in the balance sheet, in a combined income statement and changes in retained earnings statement, or as a separate schedule. Cash flow statements report a company’s inflows and outflows of cash. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets.

While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash. A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time. It uses and reorders the information from a company’s balance sheet and income statement. Generally, cash flow statements are divided into three main parts. Each part reviews the cash flow from one of three types of activities: (1) operating activities; (2) investing activities; and (3) financing activities.

Retained Earnings Statement are a financial statement that lists a firm’s accumulated retained earnings and net income that has been paid as dividends to stockholders in the current period. It breaks down changes affecting the account, such as profits or losses from operations, dividends paid, and any other items charged or credited to retained earnings. A retained earnings statement is required by Generally Accepted Accounting Principles (GAAP) whenever comparative balance sheets and income statements are presented.

It may appear in the balance sheet, in a combined income statement and changes in retained earnings statement, or as a separate schedule. In conclusion we have discussed each financial statement separately, keep in mind that they are all related. The changes in assets and liabilities that you see on the balance sheet are also reflected in the revenues and expenses that you see on the income statement, which result in the company’s gains or losses. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement.

And so on. No one financial statement tells the complete story. But combined, they provide very powerful information for investors. And information is the investor’s best tool when it comes to investing wisely. References The Beginners’ Guide to Financial Statements, U. S. Security and Exchange Commission2007. http://www. sec. gov. QuickMBA, Financial Accounting, Retrieved on January 20, 2010, from: www. quickmba. com Financial Accounting, Kimmel, Paul D. , Kieso, Donald E. , Weygandt, Jerry J. , 6th Edition, 2007.

×

Hi there, would you like to get such a paper? How about receiving a customized one? Check it out