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This posting addresses the basics of financial statements.

Identify the four basic financial statements.
Describe the purpose of each of the four financial statements.
Discuss how the financial statements would be useful to internal users, such as to managers and employees.
Discuss how the financial statements would be useful to external users, such as investors and creditors.

Solution Preview

The four basic financial statements are the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows. The balance sheet contains three different main sections, including assets, liabilities, and shareholder's equity. The assets section contains current assets, such as cash, accounts receivables, and inventory, followed by the long term assets, which typically include assets that are held for more than one year (various financial security investments) and fixed assets, like property, plant, and equipment, which are reported along with their respective amounts of accumulated depreciation.

On the opposite side of the balance sheet (the right side), the liabilities are listed, with the current liabilities first. Current liabilities include account payables and notes that are due within one year's time. This is followed by long-term liabilities, which include liabilities due in more than one year's time. The shareholder's equity section includes amounts of contributed capital, retained earnings, and total stockholder's equity. The purpose of the balance sheet is to allow users to determine how liquid the company is as of the balance sheet date. Many accountants have called a balance sheet a statement of liquidity because it allows users to see how much cash the company currently has, and how effectively they are using their cash to work for them. It also shows if the company has enough in cash to meet their current obligations or if the company is drowning in debt.

The income statement shows the company's gross revenues first on the statement, followed by the cost of goods sold and the gross profit. The company's expenses are ...

Solution Summary

This solution provides a very detailed discussion identifying the four basic financial statements, the purpose of each of the four financial statements, how the financial statements would be useful to internal users, such as to managers and employees, and how the financial statements would be useful to external users, such as investors and creditors. References are also included.

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