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Financial Statements Paper

Essay by   •  January 14, 2013  •  Essay  •  871 Words (4 Pages)  •  1,458 Views

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In the accounting world there are four basic financial statements for any business. They each serve their own purpose and are useful to internal users as well as external users. I plan to discuss what each statement is, describe its purpose, and explain how they are useful to internal and external users.

The first financial statement is "to present a picture at a point in time of what your business owns (its assets) and what it owes (its liabilities), you prepare a balance sheet" (Kimmel, Weygandt, & Kieso 12). The purpose of the balance sheet is for a business to put into writing their assets and liabilities with the main goal of ensuring that those assets balance with the claims to assets. Those claims to assets are also divided into two categories, claims of creditors and claims of owners. The claims of creditors part is also referred to as the businesses liabilities. The balance sheet is important because it enables stockholders, creditors, and employees to see the clear picture regarding the businesses assets and liabilities.

The second financial statement is "to show how successfully your business performed during a period of time, you report its revenues and expenses in an income statement" (Kimmel, Weygandt, & Kieso 12). The income statements purpose is to report how successful or unsuccessful a business has been over a specific period of time. A list of the businesses revenues and expenses are listed on its income statement. Income statements reflect past performance and are useful in predicting future performance of any given company.

The third financial statement is "to indicate how much of precious 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 12). The purpose of a retained earnings statement is to illustrate how profitable a business was, how much dividends to pay to their shareholders, and how much they kept for future expansion of their business. It also illustrates any fluctuation in retained earnings during the specific period.

The fourth and final financial statement is "to show where your business obtained cash during a period of time and how that cash was used, you present a statement of cash flows" (Kimmel, Weygandt, & Kieso 12). The main purpose of the statement of cash flows is to provide the cash receipts and cash payments for a business from a specific period. This is important because it represents a company's operating, investing, and financial activities for the specific period. The statement of cash flows also illustrates any increase or decrease in cash and the amount of cash that is left.

These four financial statements can be useful to internal users such as managers, marketing departments, and employees because they all report

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