Running head: WEEK 1 FINANCIAL STATEMENT PAPER

Financial Statement Differentiation Paper Michelle J. Dickerson ACC 561 February 1, 2011 Sheila Woods

WEEK 1 FINANCIAL STATEMENT PAPER

Financial Statement In this paper, the subject is to discuss the four different types of financial statements. In this paper, the financial statement will be briefly defined as well as how and why these statements would be of interest to specific group such as creditors, investors, and managers. Financial Statement A financial statement is recording of activity for organizations transactions. The financial statements are used by managers and investors assist in determining the steps in which they may need to take to make business decisions. All financial statements are key elements to business planning. Accounting Accounting is designed to support and track the financial information of a company. Internal and external partners such as managers, investors, and customers use these accounting reports. According to Merriam-Webster (2012), accounting is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the result. Its purpose is to identify and report the economic activities of business entities and is made up a variety of interrelated reports. These reports relay a variety of information, including assets, liabilities, expenses, and revenues, all of which are of interest to users of accounting information. According to Kieso, Kimmel, and Weygandt (2009), this information is arranged in the format of four different financial statements, which form the backbone of accounting. These four

WEEK 1 FINANCIAL STATEMENT PAPER documents are the balance sheet, income statement, retained earnings statement, and the statement of cash flows. Types of Statements There is four basic statements, balance sheet, income statement, statement of cash flow, and shareholder equity. Balance Sheet The balance sheet can be used by managers or investors to determine the amount of

assets, liabilities and stockholder equity that a business has. In addition, this statement can give an organizations leaders an opportunity to state their financial position, good or bad. In most cases, the balance sheet is used annually to analyze current and fixed assets, current and longterm liability and the equity of shareholders. Income Statement This statement is best used for tracking the statement of current operations. The document provides company leaders with information on revenue, income and expenses. The income statement is a key document for investors because it reports share-holding positions within the company. The income statement is most likely the most used financial statement because of all the helpful information such as, interest payments, tax payments and provides a report on dividends. The Retained Earnings Statement If a business is profitable, owners must determine how much profit to payout to the shareholders. The retained earnings statement reflects the amount of profit distributed as dividends to shareholders and the amount of net income retained for future growth. These

WEEK 1 FINANCIAL STATEMENT PAPER distributed amounts and other changes in the retained earnings statement are recorded from the same period as an income statement. Investor An investor would benefit from using the income statement and retained earnings. It would be important to an investor to know that the business invested in is stable. The investor would want to know the expenses do not outweigh the income and that there is a profit to be made with this business. Creditor

A balance sheet and statement of cash flow would be of most interest to a creditor. The creditors would be interested in knowing how much cash is used for business operations rather than credit. The creditors would want to know that the business owner could pay its debts by evaluating the balance sheets for an understanding of the financial standing as specific periods. Management Because managements main responsibility and duties are to oversee daily operations of the business, the management would benefit from using balance sheets, income statements, and cash flow statements at all times. This would enable management In conclusion, the use of each of these statements are vital to the complete functional to any organization. The method in which they are used can be disseminated through the chain of commands but all are needed.

WEEK 1 FINANCIAL STATEMENT PAPER References Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons