Fundamentals of Financial Statements

Fundamentals of Financial Statements Paper

Introduction

Accurate financial statements are essential to informed decision making. The first step in ensuring accuracy of financial statements is the correct recording of business transactions. In this simulation we will go through and discuss the importance of accurate financial statements. Let’s begin by given a synopsis of the simulation: Connie Rocha pondered the future of her small new business. She took care of the marketing activities, with the help of community contacts getting business would not be a problem. Her sister on the other hand would supervise the production of the business. But when business started to become really lucrative, Connie needed someone to maintain the accounting books. Connie asked Tony Levin a CPA and I to help her maintain her accounting books for her business. While getting her books together Tony informed me that one way of looking at business transactions is to identify the property under discussion, its owner, and the amount of increase or decrease caused by the transaction. First we need to discuss the transactions in the simulation, and how they affect more than one financial statement. I will identify five transactions in the simulation and specify the different information that is conveyed to the manager in each of the financial statements.

Financial Statements

Financial statements form part of the process of financial reporting. A complete set of financial statements normally includes a balance sheet, an income statement, a statement of changes in financial position (which may be presented in a variety of ways, for example, as a statement of cash flows or a statement of funds flow), and those notes and other statements and explanatory material that are an integral part of the financial statements. They may also include supplementary schedules and information based on or derived from, and expected to be read with, such statements. Such schedules and supplementary information may deal, for example, with financial information about industrial and geographical segments and disclosures about the effects of changing prices. Financial statements do not, however, include such items as reports by directors, statements by the chairman, discussion and analysis by management and similar items that may be included in a financial or annual report.

The management of an enterprise has the primary responsibility for the preparation and presentation of the financial statements of the enterprise. Management is also interested in the information contained in the financial statements even though it has access to additional management and financial information that helps it carry out its planning, decision-making and control responsibilities. Management has the ability to determine the form and content of such additional information in order to meet its own needs. The reporting of such information, however, is beyond the scope of this Framework. Nevertheless, published financial statements are based on the information used by management about the financial position, performance and changes in financial position of the enterprise.

In any business no matter how big or small financial statements are crucial if achieving success is the ultimate goal. There are three main types of financial statements, they are: Income statement, balance sheet and statement of owner’s equity. All three of these financial statements can be looked upon to see where changes can be made in a company to ensure better success.

The income statement is important because it presents the revenues and expenses allowing a company to see the net income or net loss. It is prepared by simply subtracting the expenses from the revenues.

The balance sheet however is critical in reporting the assets, liabilities and owner’s equity up until a specified date. When preparing this financial statement a company simply takes all of their assets (cash, accounts payable, supplies, equipment etc.) and adds them together to get a total dollar amount for all assets. A company also takes all liabilities and owner's equity and adds them together as well. This enables the company to get a total dollar amount for all liabilities and owner’s equity just as it can with assets.

The statement of owner’s equity is a simple statement that summarizes the changes in owner’s equity for a specified period of time. It is calculated by the simple formula of: Beginning owner’s equity + additional investments + net income - drawings = ending owner’s equity. This financial statement allows the company to see if they are increasing, maintaining, or losing owner’s equity.

All three of these financial statements have an interrelationship with one another because each statement uses the numbers from the preceding