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ACC 561Financial Statement Differentiation Paper

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Accounting

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ACC 561Financial Statement Differentiation Paper
Financial Statement Differentiation Paper
It is important for organizations to communicate financial information that can be
easily interpreted, identified, and analyzed for business decision-making. According
to Kimmel, Weygandt, and Kieso (2009), “the four financial statements that are used
to communicate financial information are the income statement, balance sheet,
retained earnings statement, and the statement of cash flows.” In this paper the
subjects to identify are the information of each financial statement, which financial
statements that creditors, investors, and management are interested in, and the
reasons these statements are important to creditors, investors, and management.
Income Statement
The income statement is an important document because it contains information
about the success or Failure of a company. The income statement totals net income
by totaling revenue and subtracting total expenses in a specified period of time.
Revenues are anything that increases assets from the sale of the company’s
products or services such as sales revenue, service revenue, and interest revenue.
Expenses are any assets that have been used during the course of business to
increase revenue such as the cost of goods sold, advertising expenses, tax expense,
and rent payments. Investors and creditors are interested in a company’s income
statement because they can predict the company’s future income and earnings.
Management is also interested in the income statement because it not only shows
the company’s net income for the specified period of time but also allows
management to make important decisions regarding cutting costs and verifying
where excess funds may be needed.
Balance Sheet
The balance sheet is an important document because it is a report documenting a
company’s assets and their claim to any asset that they may not be yet paid for at a
specific point in time. The balance sheet is in the form of the basic accounting

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equation that is as follows:
* Assets = Liabilities + Stockholder’s Equity
Assets are anything that is in the form of cash, accounts receivable, advertising
supplies, office equipment, property, investments, and prepaid expenses. Liabilities
consist of accounts payable, dividends payable, accrued liabilities, payable income
taxes, employee benefits, and salaries paid to employees. Stockholder’s equity are
items such as common stock and retained earnings. Creditors are very interested in
the balance sheet because the financial information recorded will allow creditors to
determine if the company will be able to repay their debts. The company’s
management is also interested in the balance sheet because it verifies whether or
not they have enough cash on hand for immediate needs for the company and a
balance between debt and common stock financing.
Retained Earnings Statement
The retained earnings statement is the amount of earnings retained within the
company for a period of time. This statement allows management to verify how much
of the company’s profit must be paid to shareholders in the form of dividends.
Retained earnings are calculated by summing both net income and retained
earnings then subtracting dividends paid to shareholders. This document is also
important to investors because it allows investors to decide which kind of company
they want to invest in. Creditors are also interested in the retained earnings
statement because the amount of dividends paid to shareholders reduces the
company’s ability to repay any debts.
Statement of Cash Flows
The purpose of the statement of cash flows is to provide information regarding how
much cash is coming in and out of the company over a specific period of time. The
statement of cash flows consists of all of the company’s operating, investing, and
financing activities. Operating activities consist of any revenue from sales, services,
or interest payments made to the organization and any expense for cost of goods
sold, marketing, administrative, selling, taxes, and all other expenses. Investing
activities include any purchase for resources needed for the company such as plant,
property, and equipment in the form of assets. Financing activities include any action

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involving borrowing money from creditors, debt securities sold to investors, or issuing
shares of stock to investors. Creditors, investors, and managers are interested in the
statement of cash flows because it is a financial analysis of the company’s most
important asset, cash.

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