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Financial Statements Paper

Essay by   •  October 28, 2012  •  Research Paper  •  926 Words (4 Pages)  •  1,583 Views

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Financial Statements Paper

The purpose of this paper will be fourfold, but will primarily focus on how financial statements are utilized. To do so, this paper will delve into four main objectives. The first objective will be to identify the four basic financial statements. The second objective will be to describe the purpose of the four financial statements. The third objective will be to discuss how the financial statements would be useful to internal users such as managers and employees. The fourth objective will be to discuss how the financial statements would be useful to external users such as investors and creditors.

The first and second objectives are closely related, so following will be the four basic financial statements followed by a brief description of their use as applicable to accounting. The first basic financial statement is an Income Statement. An Income Statement illustrates the revenues, expenses, and income or the difference between revenues and expenses of a given company over a specific period of time (Campbell, 2012). Perhaps more simply put, if revenues exceed expenses, the result is income for the company. Conversely, if expenses exceed revenues, the result is a net loss for the company (Wiley, 2012). The second basic financial statement is a Retained Earnings Statement, which is "A statement of all transactions affecting the balance of a company's retained earnings account (Campbell, 2012)." Put another way, a retained earnings statement will illustrate the money paid out in dividends and the amount that is retained by the business (usually to put back into the business). The third financial statement is the Balance Sheet. Simply put, a balance sheet shows how much a business owns (assets) and the amount it owes (liabilities). The fourth and final financial statement is the Statement of Cash Flows. This last statement shows where all monies are utilized over a specific time period, where spent or invested, and the amount of such monies that are left after such spending or investing.

The third objective to discuss is how each of the aforementioned financial statements can be utilized by internal users in a business. First of all the internal users are various managers, particularly marketing managers, production supervisors, finance directors and company officers (Wiley, 2012). Additionally, any employee with a vested interest in company finances will utilize the four aforementioned financial statements to plan, organize, and run a business. When used collectively, the four financial statements paint a picture for internal users as to where the monies are being spent (i.e., investments, supplies, salaries, etc.), the amount of revenues or losses from such investments and expenditures, and allows decisions to be made as to where such monies should be allocated for the next period of time. For example, accountants provide detailed information for current and past performance for which

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