Financial Accounting: Financial Statement Differentiation Paper
Financial statements are used to record financial activities in which a business firm is involved. These statements provide a clear picture of a firm’s financial situation because they show its performance within a specific period. They show a firm’s managers, investors, and creditors a truthful account of its performance. Financial statements help all stakeholders to analyze a firm’s operations in a specific period. The main financial statements which are used by business firms are discussed below:
Balance Sheet
A balance sheet is used to report the sum quantity of a firm’s assets, debts, and equity.
This statement reports a firm’s financial status in a given period. It helps the management of a business firm to assess all issues that affect its performance (Stickney, Weil, Schipper, & Francis, 2009, p. 76).
Income Statement
An income statement is used to show the amount of income a company has earned in a specific period after all expenses incurred have been deducted. This financial statement helps the management of a firm to analyze if the business has made profits or losses in the period being reviewed (Stickney, Weil, Schipper, & Francis, 2009, p. 76).
Statement of Retained Earnings
This is used to show changes in the level of equity held by stockholders in a given period. It is used to report the number of dividends that have been paid out to stockholders and how this affects a firm’s operations (Stickney, Weil, Schipper, & Francis, 2009, p. 77).
Cash Flow Statement
This statement is used to show the amount of cash a firm has in its accounts to help it run its daily operations. This statement helps managers to evaluate sources of income and expenditure patterns to determine if the firm can conduct its operations properly (Stickney, Weil, Schipper, & Francis, 2009, p. 77).
Investors who want to inject their funds into a business firm are likely to be interested in all financial statements. They would want to know if the firm has a strong position in the market as reported by its balance sheet. Investors would also want to know if the firm has been making profits or losses to determine its growth prospects. Lastly, they would want to know the size of equity they will hold in the firm once they have invested their capital (Kimmel, Weygandt, & Kieso, 2009, p. 80).
Creditors are likely to take a keen interest in a firm’s balance sheet, income reports, and statements of cash flow. They would want to know about a firm’s assets and liabilities and how they affect its operations. This enables creditors to assess if a firm is registering good performance to enable it to pay off all its debts. Creditors would also want to know if a firm has the required amount of cash to run its day-to-day operations (Kimmel, Weygandt, & Kieso, 2009, p. 83).
Managers would be more interested in all financial statements. All these statements reflect managers’ ability to perform their responsibilities effectively. Managers need to assess if the firm they work for has made a profit or a loss in the period being reviewed. They have to assess performance levels in firms they work for to enable them to formulate effective strategies. They also need to be aware of cash flow situations in their firms to assess their ability to operate without any disruptions (Campbell, 2002, p. 69 ).
References
Campbell, D., Stonehouse, G., & Houston, B. (2002) Business strategy. New York, NY: Elsevier Science.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons.
Stickney, C., Weil, R., Schipper, C., & Francis, J. (2009). Financial accounting: An introduction to concepts, methods and uses. Mason, OH: Cengage Learning.