There are four main types of financial statements in the account world. Each statement has a difference focus and importance. Managers, creditors, and investors to learn about a company’s financial status and to make decisions about the company use the financial statements. Each financial statement type will briefly be defined and explained in this paper. Also, why these statements are of interest to managers, creditors, and investors. According to Kimmel, Weygandt, and Kieso (2009), “Assets, liabilities, expenses, and revenues are of interest to users of accounting information. This information is arranged in the format of four different financial statements, which form the backbone of financial accounting”.
Types of Statements
Financial statements are used to record a business’ activities. They are used as key components to making business decisions. There are four financial statements. These statements are the income statement, balance sheet, retained earnings statement, and statement of cash flows.
An income statement is used best for tracking the operations of a business during a specific period of time (Kimmel, Weygandt, Kieso, 2009). The income statement provides information about a business’ revenues and expenses. The statement also shows a business’ net income or net loss by deducting expenses from the revenues.
The balance sheet shows a business’ assets and liabilities at a specific point in time (Kimmel, Weygandt, Kieso, 2009). It shows how much a business has in assets, liabilities and stockholders’ equity. The balance sheet explains how assets are a combination of stockholders’ equity and liabilities. Assets must balance out with liabilities and stockholders’ equity. Assets are divided into claims of creditors and owners. Stockholders’ equity is divided into retained earning and common stock (Kimmel, Weygandt, Kieso, 2009).
Retained Earnings Statement
The retained earning statement shows the changes in amounts during a specific period of time in earnings retained. “To indicate how much of previous income was distributed to you and the other owners of your business in the form of dividends, and how much was retained in the business to allow for future growth, you present a retained earnings statement” (Kimmel, Weygandt, Kieso, 2009). A business must be able to determine how to pay shareholders their earnings when a business is profitable
Statement of Cash Flows
The statement of cash flows shows the business’ cash payments and receipts for a specific period in time. It also shows how the cash was used during this specific time period. “To help investors, creditors, and others in their analysis of a company’s cash position, the statement of cash flows reports the cash effects of a company’s operating, investing, and financing activities.” (Kimmel, Weygandt, Kieso, 2009). It shows cash increases or decreases and ending cash balances for a specific period of time. All users have a specific interest in this statement because cash is an important resource for businesses.
Investors benefit the most from the information provided in the income statement and retained earnings statement. The income statement is a key document to investors because it shows the business’ position on holdings. The retained earnings statement is useful to investors because it allows for evaluation of the performance of dividend payment.
The income statement, balance sheet, and statement of cash flows would be of most interest to a creditor since creditors are interested in knowing how a business is using cash for business operations instead of using cash for credit. Creditors are interested in the income statement because it helps to predict future earnings. The balance sheet is used for creditors to determine if the business can pay back their debts. The statement of cash flows, reports the cash effects for a business.
The main responsibility and duty of management is to supervise a business’ daily operations. Management would benefit from using all financial statements but mainly the income statement, balance sheet, and statement of cash flows.
The financial statements are interconnected and so important information about a business and their operations for a specific period in time. The relationship between the statements helps to give a complete and more accurate picture of the business and the health of the business.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed.). Retrieved from The University of Phoenix eBook Collection database.