Basic Financial Statements

There are four basic financial statements in the reporting process of accounting: income statement, retained earnings statement, balance sheet, and statement of cash flows. These statements are prepared for a specific amount of time, usually one month, three months, or a year. Many companies issue financial statements for each month, then each quarter, one year, three years, and five years. All four of these statements are interrelated with the other. Each statement is labeled with a heading of the name of the company and the time frame being represented along with the type of statement that it is.

The revenues are listed and the expenses on the revenue statement. The expenses are subtracted from the revenue showing a net income or a net loss. A retained earnings statement shows the changes in retained earnings during the time frame represented by the header on the retained earnings statement. The balance sheet states the value of a company's assets, liabilities, and stockholders' equity on a certain date. The statement of cash flows sums the receipt of and payments of cash during a certain time frame. (Wygandt 5th Edition)

The net income or net loss amount that comes from the bottom of the income statement is used to add or subtract from the retained earnings beginning balance for the time frame being used. The ending balance from the retained earnings is netted with the common stock total on the balance sheet. The cash amount at the top of the balance sheet should match the ending cash balance on the statement of cash flows.

There are basic objectives of financial reporting. The main objective of the financial report is to provide information. The information provided in the financial statements should be useful for people making credit and investment decisions. The information should also be helpful in projecting future cash flow and helpful to identify assets, liabilities, and changes within them. (Wygandt 5th Edition)

Financial statements are useful to many people and companies. Financial statements are also useful to individuals located within the company itself and ones outside of the company.

Potential creditors use the financial statements to see if the business is worthy of credit being extended to them. Creditors, either short-term or long-term, must determine if the business is profitable, will remain profitable, and have the ability to pay back the funds loaned or pay for the services rendered.

Investors are interested in the financial statements to see if the company is profitable and will continue to be profitable to know whether or not the business would be a smart investment. People or companies do not want to invest