The four basic financial statements that are prepared by for-profit companies are the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows. These are the financial statements that owners, investors, and auditors will look at primarily to see how the company is doing, and where the money is coming in and out of the company. These statements are also indicative of the financial risk of a company. This paper will discuss the elements which make up these statements and their correlation to one another as well as their significance to a company.
The balance sheet is comprised of the assets, liabilities, and stockholders’ equity of the company. The assets are further broken down to the cash, accounts receivable, inventory, plants and equipment, as well as the land the company holds. The liabilities are further broken down to the accounts payable as well as the notes payable. The stockholders equity shows the contributed capital as well as the retained earnings for the company. The balance sheet basically breaks down everything the company owns, is entitled to, and owes out.
The income statement breaks down the income of the company, which is determined by stating the revenues that are coming into a company versus the expenses that are going out of the company. For example, the income statement may show the sales revenues as well as the cost of the goods sold, the administrative expenses, the research expenses, and the income tax expenses just to name a few. The income statement will show how well a company is utilizing the money that it is generating based on sales versus the way in which a company spends to cover expenses. This statement is indicative of whether a company is making enough money to stay in business.
The statement of retained earnings is self-explanatory. It calculates the retained earnings for a specific period, reports the net income, dividends, and retained earnings for the new period of time. This statement allows stockholders to see the earnings they are making on their investment in the company. The statement of cash flows shows where the money is coming in and out of a company. The statement further breaks down the cash coming in from various sources, such as investment income, sales, and any other sources that are paying a company. It also reports how the cash is flowing out of the company, such as being paid for taxes, interest, suppliers, and employees. This statement will show the cash at the beginning of a specified period versus the cash at the end of the period and where it went in between. All four statements paint a picture of the financial health of a company.
- Libby, R., Libby, P., Short, D. (2009). Homework Manager for Financial Accounting. Retrieved from http://highered.mheducation.com/sites/0073324833/information_center_view0
