This paper will discuss four basic financial statements, the purpose of each financial statement, and how these statements will be useful to internal and external users. Four Basic Financial Statements The four basic financial statements are a balance sheet, income statement, retained earnings statement, and statement of cash flow. The Purpose Of Each Statement A balance sheet “reports assets and claims to assets at a specific point in time” (Kimmel, 2009,).
A balance sheet is important when a business decides to apply for a line of credit. Creditors evaluate the company’s balance sheet to determine whether or not the company will pay back. The conclusion of this statement confirms if the company has sufficient funds for immediate cash needs. An income statement “reports the success or failure of the company’s operations for a period of time” (Kimmel, 2009,). This offers a bank to determine if the company is profitable enough for repayment of a loan. The retained earnings statement “shows the amounts and causes of changes in retained earnings during the period” (Kimmel, 2009,).
This is a breakdown of what is earned and deducted in a business. Deductions range from Medical, insurance, taxes etc. A cash flow statement “is to provide financial information about the cash receipts and cash payments of a business for a specific period of time” (Kimmel, 2009,). A cash flow statement provides investors and creditors an outline of how the company is operating, investing, and financing assets and liabilities. Internal Users Financial statements would be useful to internal users because accounting delivers internal reports.
Managers and employees like to see projections of income, and financial comparison this shows future income. Overall managers and businesses ask many questions about products, sales campaigns etc. so with the use of financial statements it will sum up information managers need. External Users There are different types of external users the main two are investors and creditors. Showing financial information to these external users is important because it identifies records and shows different events that have taken place and is organized to interested users.
Investors use this information to determine whether or not to buy, hold, or sell stock. Creditors such as banks and suppliers evaluate the information looking for risks of selling on credit or lending money. Conclusion Financial statements are very important when doing business. When being used they keep track of the company’s transactions and they can also cross reference if there were any errors made. References Kimmel, P. D. (2009). Financial Accounting: Tools for Business Decision Making (5th ed. ). Retrieved from The University of Phoenix eBook Collection database.
