Financial Statements come in four basic types; income statement, retained earnings, the statement of cash flow and the balance sheet. These statements are used both internally and externally to calculate the profitability and liabilities of a company. The financial statements of a company are the window for managers, investors, and creditors into the stability of a company. The details of a financial statement differ from the type of the statement and are used by different entities to determine if they want to invest in the company, lend to the company or by managers to determine if the company is operating and the needed level to continue growing.
The income statement is a snapshot for a defined time that lists revenues and expenses to equal the net income of the company. Revenues are broken down into sales and other sales. Expenses are items such as cost of goods sold, selling marketing administrative costs, and total income tax. The income statement reports on the success or failure of the company’s operations by reporting its revenues and expenses. If the company’s revenues exceed its expenses, it will report net income; otherwise it will report a net loss (Kimmel & Kieso, 2009). The income statement reports of the company’s operations are profitable or not. The income statements reports how successful the company is at generating a profit at sales.
Retained earnings statements are statements of shareholders in dividends and earnings paid to owners. This statement shows the earnings kept by the owners to ensure future growth. High-growth companies generally do not pay dividends and reinvest into the company. This statement shows amounts and cause of change during a period in time. The beginning of the statement shows retained earnings and adds net income and deductions for dividends.
The balance sheet is the third type of financial statement that show claims to assets over a certain period of time. The balance sheet brakes down the short -term and long- term assets of the company. The balance sheets groups similar assets with similar liabilities. Current assets are listed first, long-term investments nets and fixed assets, along with intangible assets like patents. Current liabilities payable in less than a year such as notes payable, accounts payable, salaries payable, unearned revenue, and interest payable are listed first. These are followed by mortgage notes due in more than one year and other notes due in more than a year. Last listed are stockholders equities such as common stock, and retained earnings. Companies list assets in order for which they expect to convert to cash (Kimmel & Kieso, 2009).
The last type of basic financial statement is the statement of cash flow. This statement discloses cash receipts and cash payments made to the company for a specific period of time. The statement of cash flow reports the operating, investing, and financial activities of the company. This statement will answer questions such as where did the money come from, how as the money used, and what was the change that happened? Negative numbers are reflected with brackets (). Additionally, these statements report the net increase or decrease in cash during a period in time and the amount of cash at the end of said time.
Many entities use financial statement, both inside, and outside the company. Managers can use the balance sheet to determine if the cash on hand is sufficient for immediate cash needs. They can also use these statements to look at the relationship between debts and stockholders’ equity to determine if the company has satisfactory proportion of debt and common stock financing (Kimmel & Kieso, 2009). Creditors can use the financial statements to determine the likely hood of being repaid. The statements will tell the creditors if there are sufficient assets to sell to repay a debt. Using ratio analysis, revenues- expenses= net income, the creditor can measure the success of a company for a given period. Long- term investors and creditors look at the solvency of a company; that is the measurement of long- term survival of the company. Investors use financial statements to determine if they should invest in the company or cash out the stocks they hold, because of losses in the company. Publicly traded companies must release annual reports, including financial statements, manager’s discussion and analysis, notes to the financial statements and an independent auditors report. Investors use all of these items to ensure they are making a sound investment.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Financial accounting: Tools for business decision making (5th ed.). Hoboken, NJ: John Wiley & Sons.