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Accounting - Financial Statement Differentiation

Categories: AccountingBusiness

Financial Statement Differentiation There are four different types of financial statements; they are balance sheets, income statements, retained earnings statements, and statements of cash flows. Each of these financial statements are important to investors, creditors, and management in various ways. This paper will provide further insight into these financial statements as well as explore, which of these would be of interest to investors, creditors, and management. Financial Statements Balance Sheet The balance sheet, according to Kimmel (2009), reports assets and claims to assets at a specific time.

Assets are things that a company owns that have value, liabilities are amounts of money that a company owes to others, and stockholders’ equity the money that would be left if a company sold its assets and paid off all of its liabilities. Essentially the balance shows the supplies on hand at the end of the year and the total debts outstanding at the end of a period. Income Statement The income statement reports the success or failure of the company’s operations for a time (Kimmel, 2009).

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An income statement also shows the costs and expenses associated with earning that revenue.

This shows how much the company earned or lost over the period (Beginners’ Guide to Financial Statements, 2007). Most important, it outlines the revenue generated during the period is examined. Retained Earnings Statement The retained earnings statement, according to Kimmel (2009), shows the amounts and causes of changes in retained earnings during the period. The period is the same as that covered by the income statement.

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According to Investopedia (2011), the statement of retained earnings reconciles the beginning and ending retained earnings for the period, using information such as net income from the other financial statements.

Statement of Cash Flow The primary purpose of a statement of cash flow is to provide financial information about the cash receipts and cash payments of a business for a specific period (Kimmel, 2009). Whereas an income statement shows if a company made a profit, a cash flow statement shows if the company generated cash. It also shows what cash received from issuing new bonds during the period Investors, Creditors, and Management Investors Kimmel (2009), states that investors are interested in a company’s income statement to note its past net income because it provides useful information for predicting future net income.

Investors also monitor retained earnings statement as they may seek companies that have a history of paying high dividends or companies that reinvest earnings to increase the company’s growth instead of paying dividends. The statement of cash flow reports help investors analyzes a company’s cash position, according to Kimmel (2009). Creditors Creditors analyze a company’s balance sheet to determine the likelihood that they will be repaid and creditors also use the income statement to predict future earnings (Kimmel, 2009).

This information predicts the likelihood if an investor would be repaid. According to Kimmel (2009), lenders also monitor their corporate customers’ dividend payments through a retained earnings statement because any money paid in dividends reduces a company’s ability to repay its debts as well as a company’s cash position through the statement of cash flows reports to understand the company’s operating, investing, and financing activities. Management Managers use the balance sheet to determine if cash on hand is sufficient for immediate cash needs.

They also look at the relationship between debt and stockholders’ equity to determine if the company has a satisfactory proportion of debt and common stock financing (Kimmel, 2009). Conclusion The different financial statements that a company provides to investors, creditors, and management are important to each in different ways as outlined in this paper. They use the information provided in each of these financial statements to make crucial decisions for themselves and their company.

Because crucial decisions are being made, it is important for each to understand the meaning of these financial statements so that they are able to determine the possible success or failure of a company. References Beginners’ Guide to Financial Statements. (2007). Retrieved from http://www. sec. gov/investor/pubs/begfinstmtguide. htm Investopedia. (2011). Retrieved from http://www. investopedia. com/terms/s/statement-of-retained-earnings. asp#axzz1gvGPnGBJ Kimmel, P. D. (2009). Accounting: Tools for Business Decision Making. : John Wiley & Sons, Inc.

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Accounting - Financial Statement Differentiation. (2020, Jun 01). Retrieved from http://studymoose.com/accounting-financial-statement-differentiation-new-essay

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