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Acc 280 Financial Statements Paper

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Accounting

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Homework

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Financial Statements 1
Financial Statements
ACC 280
Financial Statements 2
Introduction
The purpose of this paper is to define accounting, and identify the four basic financial
statements. The paper also explains how the different financial statements are
interrelated to each other and why they are useful to managers, investors, creditors,
and employees.
Accounting
Accounting is a business discipline that allows companies to record, analyze, and
retrieve critical financial information that can be used to determine a company's
financial status. Its purpose is to help people understand what is going on financially
within an organization provide reports and insights needed to make sound financial
decisions. Effectively communicating this information is key to the success of every
business. This information is reported in the form of four financial statements.
Financial Statements
The four basic financial statements of accounting are the Income Statement,
Balance Sheet, Retained Earnings Statement (a.k.a. Statement of Stockholders
Equity), and Statement of Cash Flows. The Income statement shows the profitability
of the company over a specific period of time. Classifies financial data under two
categories revenues and expenses. It represents revenues earned and expenses
incurred. (Formula: Revenue-Expenses=Net Income or Net Loss). The Retained
Earnings Statement a.k.a. Statement of Stockholders Equity shows increases and
decreases to stockholders equity accounts for a specific period of time. (Formula:
Stockholders Equity= Common Stock + Retained Earnings).The Balance Sheet
reports financial data under

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Financial Statements 3
three categories assets, liabilities, and stockholder’s equity. Shows the financial
position of the company on a particular date. It shows not only what is owed by the
company but also what is owned. (Formula: Assets= Liabilities+ Stockholders Equity
(Common Stock + Retained Earnings= Stockholders Equity) or Assets – Liabilities =
Stockholders Equity). The Statement of Cash Flows reports the cash receipts and
payments for a specific period of time. Where cash comes into the company from,
where it has gone out to, and changes in the cash balance for a specific period of
time. It is divided into three categories: Operating activities shows revenues received
and expenses incurred. Investing activities shows buying and selling of fixed assets
and other investments. Financing Activities shows where the company’s long term
finances generated from. Includes borrowing (long term debt) and issuance of
common stock and preferred stock.
Financial Statements Usefulness
Companies around the world view financial statements in order to stay abreast of
their company’s economic status. Financial statements are imperative to ensure
smooth operation and financial stability. A healthy business has no problem handling
financial outputs and incoming assets. Financial reporting creates an atmosphere
essential for promoting the feeling reliability and trust among investors and creditors.
Accurate financial statements are vital to avoid misrepresentation. However, as
credit professionals are well aware, numbers can sometimes be manipulated. Thus,
it is important to have statements that are audited by an independent accounting
firm. (Norris, 2006) Enron is an example of what the result of inaccurate or
misrepresented financial data can cause in today’s society.
Financial Statements 4
Financial statements are useful in any organization that has monetary value. The
type of business involved affects the type of data that a financial statement will
encompass. The user’s preferences additionally affect the data. Financial statements
are considered the primary option for reporting the financial status of an
organizations activities and transactions to outsiders. The external statements are
usually tailored to meet the needs of many external entities. Reviewing your financial

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statements with your advisor will help to dispel any disparities that may exist in the
perception of your company’s value. (Ohara, 2007) Most financial statements are
made public for the benefit of stakeholders and potential investors. The bottom-line is
that financial statements are the main source for analyzing how well a company is
operating. The income (or profit and loss) statement is simply a report card of how
much activity (revenue) was performed in the period, how profitable that activity was
(gross profit/loss), and what it cost the contractor to run the business (overhead).
(Murphy, 2006)
How Financial Statements are interrelated
Financial statements are interrelated. It is so because the financial position of a
business changes after each session of good or bad financial performance. Until we
measure both financial performance and position, we cannot predict the cash flow
position of the business.
A change in one statement would affect the others. It is concluded the financial
statements do have an interrelationship with each other and they must be
understood with their interrelationship in order to be properly interpreted. The order
should be to first the income statement, then the balance sheet, Retained Earnings
Statement and finally the Statement of Cash Flows.
Financial Statements 5
Conclusion
Some individuals assume that the usefulness of financial statements is to predict the
future of a business with data from the past. Sometimes this can be true in respect
for trends that have continued for many years, for at least the near future. The fact is
financial statements are just a snap shot of the past. To a serious investor, financial
statements analysis reveals much more than a company’s earnings, they provide
important insights into how effectively management is controlling expenses, the
amount of interest income and expense, and the taxes paid. (Kennon, 2005) In my
opinion financial statements should not be used as a basis for making decisions but
rather as an aid in the process.

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