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Financial Statements and Accounting Basis

Can someone please explain what the financial statements are and what they tell you tell you? Is there one that's more important than the others? If so, why?

Also, are the Cash basis, Accrual basis and Tax basis the only three different bases of accounting? I understand when to use the Tax basis, but when would you use the Cash basis and Accrual basis? Is one better than the other? If so, why?

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> Financial Statements are and what they tell you tell you...?

A FINANCIAL STATEMENT is a written report which quantitatively describes the financial health of a company. This includes an income statement and a balance sheet, and often also includes a cash flow statement. Financial statements are usually compiled on a quarterly and annual basis.

There is not one financial statement that is more important than the other, per se; they all serve different purposes:

* The income statement, also referred to as a "profit and loss statement," "statement of incomes and losses," or "report of earnings," tells you or your investors:
o the income the business has earned during the accounting period
o the costs or expenses that were incurred by the business during the period
o the difference between the costs and incomes for the period, or net profit (or loss)

* The balance sheet is a statement of a company's relative wealth or financial position at a given point in time. It shows assets, liabilities, and owners' equity.

* The position statement, also known as the "statement of changes in financial position" or "sources and uses of cash," helps to explain how a company acquired its money and how it was spent.

* The statement of changes in owners' equity is used to bridge the gap between the amount of owners' equity at the beginning of the period and the amount of their equity at the end of the period.

* Common size financial statements provides an easy way to spot trends in your balance sheets and income statements over time is to convert the dollar amounts to percentages.

Financial statements are only a starting point for analysis; they do have limits. Individual numbers aren't good or bad in themselves ? one may have to dig for the reason behind any numbers ...

Solution Summary

Almost 1200 words explain the importance of financial statement and what they can tell you, as well as about the three bases of accounting - cash, accrual and tax.