Family and Medical Leave Act

Finance For Executives

Final Paper

Cindy Humphrey

Financial Accounting Statements

Financial accounting statements are summaries of monetary data about an enterprise and are used to make informed decisions in the present and the future. They show the effects of transactions and other events by grouping them into classes according to their economic characteristics.

There are three basic financial statements which are the balance sheet, the income statement and the cash flow statement. The statements can be used by private individuals, non-profit organizations, manufacturers and service industries. The three major groups that take advantage of usefulness of financial statements are large corporations, investors and the government.

Financial statements play a big role in each of these groups financial decisions. Corporations decide how much credit to extend to customers and how much should be distributed to investors in dividends. Investors use a company’s financial statements to decide whether or not it would be an advantage to invest their money, and if so, how much. The government uses financial statements to determine how much has to be paid in taxes.

Each decision doesn’t always require the same financial statement. A balance sheet would be used in the decision making process for assessing a firm and determining a customer’s credit limit. It gives the user data about resources that are available as well as the claims to the resources. An income statement would prove useful in determining credit extension to customers, distribution of dividends, taxes and investment opportunities. It gives the user data about the profitability of the company detailing sources of revenue and expenses that reduce the profits.

A cash flow statement would be a useful tool because it gives a short description of how much cash is coming in, going out and where it is going. It reports cash flows from investing, financing, or operating activities. Each financial statement is a necessary tool in making any financial decision.

Investors are usually considered one of the primary users of financial statements. They use the financial statements to determine the profitability of the firm and attempt to predict its future profitability. Their interest is in the future growth of a company’s stock price and the likelihood of the company paying dividends to the owner. To be useful to investors financial reporting should provide information about the economic resources of a company, the claims to those resources, and the effects of transactions, events and circumstances that change resources and claims to those resources.

It should give information that is useful to potential investors in making rational investment decisions. The information should help investors assess the amounts, timing and uncertainty of prospective net cash flows to the related company. It should give information about the company’s financial performance during a period. Investors often use information about the past to help in assessing the prospects of a company. So, even though investment decisions show investor’s expectations about future company performance, those expectations are commonly based on evaluations of past company performance.

Financial