Financial statements are a means of communicating numbers within a business. Without proper numbers your business could be a success or a big failure. “You will rely on them to make decisions, and managers will use them to evaluate your performance. That is true whether your job involves marketing, production, management, or information systems” (Kimmel, 2009).
The financial statements shows the business financial standpoint at a given time period, and it also helps the business to understand what they need to do to improve.
A company’s livelihood depends greatly on their financial statement because it determines if the business is successful, can it hire new employees, or can it receive any more additional loans. A financial standpoint of the company is monitored by its financial statements. The four basic financial statements are retained earnings statement, balance sheet, income statement, and statement of cash flow. During a certain time period presenting a snapshot of what your business owns (its assets) and what it owes (its liabilities), you prepare a balance sheet.
“To show how successfully your business performed during a period of time, you report its revenues and expenses in an income statement” (Kimmel, 2009).
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Specifying how much of prior income was dispersed to you and the other owners of your business in the form of dividends and how much was reserved in the business to allow for future growth a retained earnings statement is presented. Showing where your business obtained cash during period of time you would prompt a statement of cash flow.
The purpose of balance sheet it to show the amount of assets a company has obtained by evaluating the claims of creditors and the claims of owners. This type of relationship can be shown in an equation assets equal liabilities plus stockholders equity. A company success or failure is monitored by its income statement because it shows a company’s revenue monitored by its expenses. The net income is obtained through the income statement by deducting its expenses from its revenues. The retained earnings statements are different because retained earnings are the net income retained in the corporation.
Dividend payment practices are assessed because the amount of the retained earnings statements is deducted or added by the company’s dividends. The statement of cash flow shows the company operating, investing, and financing doings. It shows the company cash position and what is happening to its most important source. Managers use financial statements for several purposes. If a company needs to meet labor demands and need to hire new employees the financial statements helps in knowing how many employees they can afford to hire.
On the income statement, management compares sales and expenses of a period of time with recent events to notice if there is a big change. They can identify likely problems and investigate the cause; however, they can regulate if they can afford new equipment, merchandise, and other operating expenses. Using the balance sheet managers can determine if a change applied helped the company or delayed it. Employees look at financial statements to know if the company is managing their money well and can meet payroll obligations.
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Employees also can gain knowledge of potential bonuses or layoffs based of the net income that is reported on the income statement. Financial statements are useful to investors and creditors because it shows the company’s financial position and allows them to make better decisions concerning the company. For the investors and creditors financial statements helps to evaluate the risks related to the possible investment or loans issued as well as estimate returns from the money invested.
Investors and creditors analyzes company’s financial position, operational results, cash generated by different activities before making investment decisions. If the company owes more than it owns than creditors may not allow that company to receive additional loans. To investors it shows if the company is operating profitably. Financial statements are vital to the success of a business. They can be used as a roadmap to direct you in the correct direction and help you avoid costly failures.
Maintaining financial statements for a company can only help a company. Improper financial statements put a company in jeopardy. The different statements show if a company can afford to hire new employees or if they need to do some lay-offs. To determine if a company can be approved for additional loans or if it is expected to fail you must rely on the financial statements. In general financial shows the financial standpoint of a company and decisions a company has to make cannot be made if there are no financial statements.
