One of the primary means of measuring success in a business is profit. Accounting provides the means to measure the various factors that affect the finances of a business by identifying, recording, and communicating economic events that affect a company (Weygandt, 2008).
Because various factors can influence an organization’s financial situation, the role of accounting is vital in which these three activities are conducted.
FOUR BASIC FINANCIAL STATEMENTS
The four basic financial statements are: income statement, retained earnings statement, balance sheet, and statement of cash flows. Companies typically produce different forms based upon the information needs of the end user. Marketing managers, production supervisors, finance directors, and executives use internal reports for managerial accounting purposes. External reports are used for financial accounting for company investors, creditors, tax auditors, regulatory agencies, unions, and customers who use the information to determine if the company is making a profit and able to fulfill its financial obligations (Lewis, 2009).
To organize and minimize the amount of information a user needs to determine a company’s health, an organization provides a breakdown based on the type of financial statement. The income statement reflects the company’s revenue and expenditures resulting in a net profit or net loss for a specified date range (Weygandt, 2008).
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... companies. Can management accounting methods be applied in other types of organisations”. Discuss this statement paying particular attention to the usefulness of management accounting information ... use this technique to determine inventory (stock) valuations and profit calculations in financial statements which help them to ask and think about the ...
Of the four statements, the income statement is the simplest; it merely reflects the difference between income and expenses, not other financial factors such as assets and liabilities. These items can be found on other financial statements.
The summarized retained earnings changes during a specific time are reflected on the retained earnings statement (Weygandt, 2008).
net income is one of the components necessary to compute the retained earnings that come from the income statement. In addition, the previous retained earnings that are added to the net income and dividends deducted from the total to give the current retained earnings are included. If the dividends are more than the previous sub-total of the previous retained earnings and net income, than the result is a loss for the company. A net profit is reflected if the sub-total of the previous retained earnings and net income exceeds the dividends.
Reporting a company’s assets, liabilities, and stockholders’ equity on a specific date is indicated on the balance sheet (Weygandt, 2008).
Part of the stockholders’ equity is the retained earnings derived from the retained earnings statement, which in conjunction with the value of the common stock held by the stockholders provides the value for stockholders’ equity (Lewis, 2009).
Assets include the cash and cash-like mediums such as bonds, certificates, or other documents that can be easily converted to cash available to the company. Other assets include accounts receivable, equipment, supplies, and real property owned by the company. Liabilities are the monies owed by the company such as accounts payable and any outflow of cash that supports the company and its employees.
The statement of cash flows provides a rundown between the inflow (receipts) and outflow (payments) of cash during the indicated date range (Weygandt, 2008).
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This statement presents a broad overview of how much cash came in and went out based upon the information contained in the summary of accounts during a specific period. At the end of the reported time period, the cash remaining equates to the cash on the balance sheet listed as an asset on the balance sheet.
The purpose of each financial statement is to assist the user in making decisions for the organization based on the latest financial information. Company owners and executives can ascertain if the company is effectively working toward its revenue goals during the reporting period by reviewing the retained earnings statement. Managers can quickly determine profitability of the organization by utilizing the income statement or using the balance sheet to see where the majority of the assets are allocated. A stockholder or client can check on how efficiently a company is managing its cash by reviewing the statement of cash flows. The usefulness of the different statements is not limited to any specific group; this is best determined by who needs the information and the type of information needed.
Conclusion
For a business to be successful, it must be profitable and competitive in its space. To achieve this, accounting plays a necessary and integral part. An organization’s players must possess a firm understanding of the financial status of the company through its accounting practices. The four basic financial statements give an overview of the information with the intention of management, oversight, auditing, compliance, and reporting to interested internal and external parties. Although the information contained in the four statements is not all-inclusive, it is enough for even a layman to grasp the financial stability of a company.
References
Lewis, M. (2009, August 31).
Financial statements. Retrieved February 6, 2010 from http://www.associatedcontent.com/article/2107033/financial_statements.html?cat=3
Weygandt, J.J. (2008).
_Financial accounting_ (6th ed.).
Hoboken, NJ: John Wiley & Sons
