There are four main types of financial statements, each of which has a different focus. Investors, managers, and creditors use financial statements to make decisions regarding a company.
An income statement reports upon the success or failure of a company’s operations during a specific time period. It lists a company’s revenues and expenses then determines the net income or loss by deducting the expenses from the revenues. Income statements are interesting to investors as it provides the information necessary to predict future performance. Creditors can also use income statements to evaluate a company’s ability to repay its loans (Kimmel, Weygandt, & Kieso, 2009).
Retained Earnings Statement
A retained earnings statement shows the amount and cause of changes in returned earnings during a specific time period; the same time period covered by the income statement. The retained earning’s statement shows the initial retained earnings amount on the first line, then adds the new income and deducts the dividends. This determines the retained earnings at the end of a period. Net losses are deducted from the amount in the retained earnings statement. Investors can use the retained earning’s statement to evaluate dividend payment performance, while creditors can use the retained earning’s statement to evaluate a company’s ability to pay its debts (Kimmel, Weygandt, & Kieso, 2009).
Assets and claims to assets at a specific point in time are reported on the balance sheet. Stockholder’s equity is the claims of owners, while liabilities are the claims of creditors. Assets are the sum of liabilities and stockholder’s equity, as they must balance with the claims to assets. Creditors use balance sheets to predict whether they will be repaid by carefully evaluating the nature of the company’s assets and liabilities. Management uses the balance sheet to determine if there is sufficient cash on hand for immediate needs, and to determine whether the relationship between debt and equity has a satisfactory proportion (Kimmel, Weygandt, & Kieso, 2009).
Statement of Cash Flows
The statement of cash flows provides financial information about the cash receipts and cash payments of a business during a specific time period. It reports the cash effects of the operating, investing, and financing activities of a company, and shows the net increase or decrease in cash during the period as well as the amount of cash at the end of the time period. As cash is perhaps the most important of a company’s resources, all users are interested in the statement of cash flows (Kimmel, Weygandt, & Kieso, 2009).
The financial statements are interrelated and share input and output. The relationships should be studied carefully to ensure a complete and accurate picture of a company’s financial health.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons.
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