Four Basic Financial Statements

Basic Financial Statements

Accountants, business owners, investors, creditors and employees use four basic financial statements of an organization to determine the financial well-being and future earnings potential of that organization. Financial statements are a key tool in seeing and understanding the past, present and future condition of an organization. What are these financial statements and what do they mean to the reader? Do the financial statements mean something completely different to an investor, creditor, and employee?

The first of the financial statements is the income statement. The income statement states the revenues and expenses in an understandable way that shows a clear picture of net income or net loss for the organization during a specific period. The main purpose of the income statement is to show how profitable an organization is and where there is room for improvement in that profitability. When one reads the income statement, he or she will see the revenues listed first then the expenses of the organization. The last item on the statement is the net loss or net income.

Second is the statement of stockholders equity. The statement of stockholders equity details changes in the investments made by the organizations owners, including stock issuances, stock repurchases, stock conversions, dividends paid, net income or net loss (McGladrey, Pullen, 2006). The third statement is the balance sheet. The balance sheet is a broad look at the organizations standing. The balance sheet shows the assets, liabilities, and stockholder’s equity for a specific period of time. The assets are listed at the top of the balance sheet, followed by the liabilities and stockholders’ equity. Assets and liabilities are divided into short-term and long-term. The bottom line of the balance sheet must be equal, which means assets must equal the liabilities and stockholders equity.

Fourth of the basic financial statements is the statement of cash flows. The statement of cash flows is a summary of the cash inflows and outflows in the organization for a specific period. The statement of cash flows shows all the investing transactions, financing transactions, normal cash effects in the organization and the net increase or decrease in cash for the period. Cash flows from operating activities are the normal cash flows of an organization. Statement of cash flows shows readers what activities are normal for the organization and which activities are abnormal. The statement also shows the capability of the organization to pay back debts and what is left to invest for future business growth. Cash flows from investment activities will show the reader which long-term assets have been acquired, and if other business entities have been acquired. Cash flows from financial activities show the reader investments made by owners of the organization. The statement also shows the cash received from a third party in the form of a loan (Mackevicius, Senkus, 2006).

Investors, creditors, management, and employees use these financial statements to see a picture of how the organization is doing. Readers use the balance sheet to determine the financial strength of the organization. The balance sheet can also show the trends of the organization. How quickly is the organization receiving payment on its accounts receivable. Investors in the organization use the balance sheet to make decisions on if the business has a good future and how much credit should be granted to the organization. Readers of the stockholders equity statement use this to see if they are any changes in ownership. If owners have pulled out of the organization and why, and if there are any new owners invested in the organization. The statement of cash flows shows the reader of the statement when and organization obtained cash, how they obtained