Financial Statements Paper

Abstract

In this paper I will identify the four basic financial statements, discuss how they are interrelated with each other, and why they are useful to managers, investors, creditors, and employees.

BALANCE SHEET

A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity.

Assets are things that a company owns that have value. This usually means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. Assets also include things that can’t be touched but nonetheless exist and have value, such as trademarks and patents. Cash itself is an asset, as well as investments that a company makes.

Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, such as money borrowed from a bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.

Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.

A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the reporting period. It does not show the flows into and out of the accounts during the period.

INCOME STATEMENT

An income statement, otherwise known as a profit and loss statement, is a summary of a company’s profit or loss during any one given period of time, such as a month, three months, or one year. The income statement records all revenues for a business during this given period, as well as the operating expenses for the business.

An income statement to track revenues and expenses so that you can determine the operating performance of your business over a period of time. Small business owners use these statements to find out what areas of their business are over budget or under budget. Specific items that are causing unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply expenses. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales. They also can be used to determine income tax liability.

Income statements, along with balance sheets, are the most basic elements required by potential lenders, such as banks, investors, and vendors. They will use the financial reporting contained therein to determine credit limits.

STATEMENT OF OWNERS' EQUITY (STATEMENT OF RETAINED EARNINGS)

Retained earnings appear on the balance sheet and most commonly are influenced by income and dividends. The Statement of Retained Earnings therefore uses information from the Income Statement