Discuss and identify how the four basic financial statements are important, and how they are interrelated with each other, and why they are useful to managers, investors, creditors, and employees.© BrainMass Inc. brainmass.com December 19, 2018, 10:41 pm ad1c9bdddf
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Discuss and identify how the four basic financial statements are important, and how they are interrelated with each other, and why they are useful to managers, investors, creditors, and employees.
The four basic financial statements to become familiar with are the income statement, balance sheet, statement of owners equity and statement of cash flows.
The income statement shows the operating results of a business over a period of time, such as a month or a year. The income statement also called the statement of earnings or statement of operations represents a financial picture of business operations during the period. From a business perspective, one of the most important pieces of information provided by the income statement is "net income" calculated as revenues minus expenses. A positive net income indicates that operations for the period were favorable while a negative net income represents an unfavorable operational position.
The purpose of the income statement is to show managers and investors whether or not the company made or lost money during the period being reported.
According to wikipedia.org, however, information in an income statement has several limitations:
? items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty)
? some numbers depend on accounting methods used (e.g. using LIFO and FIFO to measure inventory level)
? some numbers depend on judgments and estimates (e.g. depreciation expense depends on estimated useful life and salvage value).
The statement of owners equity or statement of retained earnings represents a summary of the changes that occurred in the entity's owners equity during a specific time period, such as a month or a year. Increases to owners equity arise from investments by the owner and from net income earned during the period. Decreases result from owner withdrawals and from a net loss for the period. Net income or net losses come directly from the income statement, and owner investments are capital transactions between the business and its owner, so they do not affect the income statement.
Retained earnings are part of the balance sheet (another basic financial statement) under "stockholders equity", and is mostly affected by net income earned during a period of time by the company less any dividends paid to the company's owners/stockholders. The retained earnings account on the balance sheet is said to represent an "accumulation of earnings" since net profits and losses are added/subtracted from the account from period to period.
The balance sheet lists the entity's assets, liabilities and owners equity as of a specific date, usually the end of a month or a year. The balance sheet is like a "snapshot" of the entity and for this reason it is also called the statement of financial position.
"Equity, which is the shareholders' ...
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