Whether or not myself or anybody else who may or may not be going to school to be an accountant, it’s still important to know the basic fundamentals of more than just a business and/ or company but the numbers as well. Any success comes from the time, patience, passion, potential, and MONEY. Money is most important because without it, how can anything become an investment. We have to learn the four basic financial statements to set ourselves for a future. Even if there are ones who are going to be internal users- such as managers or external users- ones who are creditors and investors that may use financial statements to use as a tool of decision making. In this essay, I have discussed the importance of financial statements and the usefulness that it is to both internal and external users.
Identifying & describing the four basic financial statements. The backbone of financial accounting is arranged in four different financial statements. The first would be a balance sheet, in which the purpose of this financial statement is presenting a picture at a point in time of what the business owns (assets) and what it owes its (liabilities). The second, an income statement, which shows how successful your business is performed during a period of time and this is where you report all the revenues and expenses. Third, the retained earnings statement, which indicates how much of previous income was distributed to you and the other owners of your business in the form of dividends- shares, and how much was retained in the business to allow for further growth and increase. Lastly, a statement of cash flows, which shows where your business obtained cash during a period of time and how much cash was used. How financial statements can be useful to internal users.
Financial statements would be useful to internal users because managers are those who plan, organize, and run an entire business; they have to be able to present summarized financial information, which is a financial statement. It is important for them to know because numbers matters when it comes down to any type of business. They have so many important questions that needs to be asked and answered; for an example, “Is cash sufficient to pay dividends to Microsoft stockholders,” which is a Finance question. All the information has to be detailed on a timely basis. Also, for internal users, accounting provides internal reports, such as forecasts of cash needs for the next year. How financial statements can be useful to external users.
External users are investors- owners, creditors, and investors. Financial statements are very important when it comes down to external users. Investors buy and sell stocks based upon their own belief of a company’s performance in the future; they are always interested in a company’s past net income because it does provide information for predicting how well the company’s will do. For an example, The United Airlines, creditors will ask “Will United Airlines be able to pay its debts as they come due?”
Concerns all depends on the past, present, and future of a company’s success of its net income because if investors and creditors didn’t have assurance in different types of businesses then the economy would suffer. Many prospective company’s look to receive loans and borrow money so they can invest into something they have been planning over a period of time but, doesn’t have the funds to cover it so they are in need of sources to finance their vision. It takes money to make money.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business making (6th ed.). Hoboken, NJ: John Wiley & Sons.