ACC 290: The Purpose Of Financial Statement
Financial Statements Paper
ACC/290
September 04, 2013
University of Phoenix
Financial Statements Paper
Many businesses continue to rise and fall in a tremendously competitive environment in the United States and across the world. There are several internal factors such as managers or employees and external factors such as competition or government interference that drive the success and profitability of a business or organization. One major component of operating a successful and profitable business is the management of financial statements. Properly maintained and accurate financial statements are a very important aspect of business in today’s globally growing and technologically advanced economic competitive market. …show more content…
Financial statements are formal records of a business ' assets, revenues, liabilities, and expenses (Kimmel, Weygandt, & Kieso, 2010). There are four basic financial statements: balance sheets, income statements, retained earnings statements, and cash flow statements (Kimmel, Weygandt, & Kieso, 2010). The purpose of financial statements is to provide a multitude of users such as shareholders, consumers, creditors, banks, employees, managers, prospective investors, competitors, and so forth with important financial information about a business (Accounting-Simplified.com, 2010). This information provides users assistance with making economic decisions because it displays a businesses’ financial position, change in financial position, and more importantly performance (Accounting-Simplified.com, 2010). A businesses’ financial performance will ultimately determine its success or failure in the market. Often the success or failure may be determined through observation of a business’s financial statements.
Balance sheets list all assets, stock holder’s equity, and liabilities specifically at a point in time (Hillstrom & Hillstrom, 2002).
The purpose of balance sheets is to provide users with the current financial position of a business based on what it owns and owes (Kimmel, Weygandt, & Kieso, 2010). For instance, creditors analyze balance sheets to determine the likelihood a debt will be repaid (Kimmel, Weygandt, & Kieso, 2010). Income statements provide a summary of gains, losses, revenues, expenses, net income, and net loss of a business for a specific period (Hillstrom & Hillstrom, 2002). The purpose of income statements is for users such as investors to predict future profitability of a business to determine whether to buy or sell stock invested in a specific business (Kimmel, Weygandt, & Kieso, 2010). Retained earnings statements show the amounts and causes of change in net income retained in a business during a period of time (Kimmel, Weygandt, & Kieso, 2010). The purpose of retained earnings statements is to determine how much of a company’s profit is lost in paying dividends to shareholders (Kimmel, Weygandt, & Kieso, 2010). Users can determine whether to invest or not invest in a company that pays high dividends. Cash flow statements summarize a business 's cash payments and receipts relating to its operating, financing, and investing activities during a particular period (Hillstrom & Hillstrom, 2002). The purpose of cash flow statements is to provide users with information about cash payments and receipts to determine how a company is obtaining and using its most important resource, money (Kimmel, Weygandt, & Kieso, 2010). These financial statements are key components for internal and external users to make economic
decisions.
For example, internal users of financial statements are owners, managers, and employees. Owners use financial statements to determine their company’s profitability and what future actions to take to improve their business’s financial success (Accounting-Simplified.com, 2010). Managers analyze the performance and financial position of a business to determine strategies to improve financial results (Accounting-Simplified.com, 2010). Employees use financial statements to determine future consequences on income and job security (Accounting-Simplified.com, 2010). Financial statements are very important to these users because owners have to determine what needs to change to remain profitable and keep their business operable. It is a manager’s responsibility to assist the owner in maximizing profitability and his or her job is on the line. Employees desire fair pay and perform better when his or her job security is not in question. Financial statements are important for these internal users because they determine economic growth, job performance, unemployment, and what company to invest their time and money in.
External users of financial statements are creditors, tax authorities, regulatory authorities, customers, and investors (Accounting-Simplified.com, 2010). Creditors use financial statements to determine terms of credit and credit worthiness of a business (Accounting-Simplified.com, 2010). If a business is performing poorly financially, creditors may deny a loan request or impose high interest rates. Tax authorities determine the credibility of filed tax returns, regulatory authorities ensure financial reporting is accurate and within the rules and regulations to protect stakeholders, customers use them to maintain a long-term stable source of supply, and investors analyze the feasibility of investing in a particular company (Accounting-Simplified.com, 2010). Investors will not invest in a company if they determine there will not be a profitable return. Investors and creditors may be the most important external users for businesses. If a business cannot obtain the financial backing of investors or loans from creditors, it might become quite difficult to compete in the market and failure is almost imminent.
In conclusion, financial statements are useful accounting documents for internal and external users. They are not the sole component of making business decisions, but they are very important. Balance sheets and cash flow statements may be the most important of the four financial statements because they provide users with the financial performance, cash flow, and profitability of a business. External users can make sound decisions based on these statements. After all, the bottom-line is money. However, users still need to be careful and not use financial statements as the lone source of decision-making. The numbers on paper may not always be truthful or accurate in reality, but that is a subject for another time.
References
Accounting-Simplified.com. (2010-2013). Introduction to Accounting. Retrieved from accounting-simplified.com/financial/users-of-accounting-information.html
Accounting-Simplified.com. (2010-2013). Purpose of Financial Statements. Retrieved from accounting-simplified.com/purpose-of-financial-statements.html
Hillstrom, L. C., & Hillstrom, K. (2002). Financial Statements. Encyclopedia of Small Business, 1(2), 505-509.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2010). Financial accounting: Tools for business decision making (5th ed.). Hoboken, NJ: John Wiley & Sons.
ACC/290
September 04, 2013
University of Phoenix
Financial Statements Paper
Many businesses continue to rise and fall in a tremendously competitive environment in the United States and across the world. There are several internal factors such as managers or employees and external factors such as competition or government interference that drive the success and profitability of a business or organization. One major component of operating a successful and profitable business is the management of financial statements. Properly maintained and accurate financial statements are a very important aspect of business in today’s globally growing and technologically advanced economic competitive market. …show more content…
Financial statements are formal records of a business ' assets, revenues, liabilities, and expenses (Kimmel, Weygandt, & Kieso, 2010). There are four basic financial statements: balance sheets, income statements, retained earnings statements, and cash flow statements (Kimmel, Weygandt, & Kieso, 2010). The purpose of financial statements is to provide a multitude of users such as shareholders, consumers, creditors, banks, employees, managers, prospective investors, competitors, and so forth with important financial information about a business (Accounting-Simplified.com, 2010). This information provides users assistance with making economic decisions because it displays a businesses’ financial position, change in financial position, and more importantly performance (Accounting-Simplified.com, 2010). A businesses’ financial performance will ultimately determine its success or failure in the market. Often the success or failure may be determined through observation of a business’s financial statements.
Balance sheets list all assets, stock holder’s equity, and liabilities specifically at a point in time (Hillstrom & Hillstrom, 2002).
The purpose of balance sheets is to provide users with the current financial position of a business based on what it owns and owes (Kimmel, Weygandt, & Kieso, 2010). For instance, creditors analyze balance sheets to determine the likelihood a debt will be repaid (Kimmel, Weygandt, & Kieso, 2010). Income statements provide a summary of gains, losses, revenues, expenses, net income, and net loss of a business for a specific period (Hillstrom & Hillstrom, 2002). The purpose of income statements is for users such as investors to predict future profitability of a business to determine whether to buy or sell stock invested in a specific business (Kimmel, Weygandt, & Kieso, 2010). Retained earnings statements show the amounts and causes of change in net income retained in a business during a period of time (Kimmel, Weygandt, & Kieso, 2010). The purpose of retained earnings statements is to determine how much of a company’s profit is lost in paying dividends to shareholders (Kimmel, Weygandt, & Kieso, 2010). Users can determine whether to invest or not invest in a company that pays high dividends. Cash flow statements summarize a business 's cash payments and receipts relating to its operating, financing, and investing activities during a particular period (Hillstrom & Hillstrom, 2002). The purpose of cash flow statements is to provide users with information about cash payments and receipts to determine how a company is obtaining and using its most important resource, money (Kimmel, Weygandt, & Kieso, 2010). These financial statements are key components for internal and external users to make economic
decisions.
For example, internal users of financial statements are owners, managers, and employees. Owners use financial statements to determine their company’s profitability and what future actions to take to improve their business’s financial success (Accounting-Simplified.com, 2010). Managers analyze the performance and financial position of a business to determine strategies to improve financial results (Accounting-Simplified.com, 2010). Employees use financial statements to determine future consequences on income and job security (Accounting-Simplified.com, 2010). Financial statements are very important to these users because owners have to determine what needs to change to remain profitable and keep their business operable. It is a manager’s responsibility to assist the owner in maximizing profitability and his or her job is on the line. Employees desire fair pay and perform better when his or her job security is not in question. Financial statements are important for these internal users because they determine economic growth, job performance, unemployment, and what company to invest their time and money in.
External users of financial statements are creditors, tax authorities, regulatory authorities, customers, and investors (Accounting-Simplified.com, 2010). Creditors use financial statements to determine terms of credit and credit worthiness of a business (Accounting-Simplified.com, 2010). If a business is performing poorly financially, creditors may deny a loan request or impose high interest rates. Tax authorities determine the credibility of filed tax returns, regulatory authorities ensure financial reporting is accurate and within the rules and regulations to protect stakeholders, customers use them to maintain a long-term stable source of supply, and investors analyze the feasibility of investing in a particular company (Accounting-Simplified.com, 2010). Investors will not invest in a company if they determine there will not be a profitable return. Investors and creditors may be the most important external users for businesses. If a business cannot obtain the financial backing of investors or loans from creditors, it might become quite difficult to compete in the market and failure is almost imminent.
In conclusion, financial statements are useful accounting documents for internal and external users. They are not the sole component of making business decisions, but they are very important. Balance sheets and cash flow statements may be the most important of the four financial statements because they provide users with the financial performance, cash flow, and profitability of a business. External users can make sound decisions based on these statements. After all, the bottom-line is money. However, users still need to be careful and not use financial statements as the lone source of decision-making. The numbers on paper may not always be truthful or accurate in reality, but that is a subject for another time.
References
Accounting-Simplified.com. (2010-2013). Introduction to Accounting. Retrieved from accounting-simplified.com/financial/users-of-accounting-information.html
Accounting-Simplified.com. (2010-2013). Purpose of Financial Statements. Retrieved from accounting-simplified.com/purpose-of-financial-statements.html
Hillstrom, L. C., & Hillstrom, K. (2002). Financial Statements. Encyclopedia of Small Business, 1(2), 505-509.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2010). Financial accounting: Tools for business decision making (5th ed.). Hoboken, NJ: John Wiley & Sons.