Running head: ABOUT FINANCIAL STATEMENTS 1

About Financial Statements

Edward Charfauros

Principles of Accounting ACC/280

January 17, 2012

Kurt Meyer

ABOUT FINANCIAL STATEMENTS 2

Financial Statements

Financial statements provide historical records reflecting a business, individual, or

organization’s financial status. Usually, financial statements relate to business ventures

remaining as analysts and investors primary source for financial information. This paper

provides information about financial statement basics and general accounting principles. A

majority of information within financial statements are corporate finance and valuation.

Accountants attempt to measure an organization’s current standing to its immediate past

performance, and financial analysis provide forward projection.

The Four Primary Financial Statements

The four basic financial statements in accounting report financial data in affective and

economical methods. According to the beginners' guide to financial statements on the United

States Securities and Exchange Commission (SEC) website (2012), “there are four main

financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow

statements; and (4) statements of shareholders’ equity” (Show me the money! section, p. 1, para.

2).

Accounting balance sheet (or statement of financial position) is an important financial

statement accountants and businesses use. Balance sheets delineate business’s current financial

circumstance, income statements inform revenues and costs, cash flow statements depict cash-

equivalents and changes, and retained earning statements provide equity changes throughout a

time frame.

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Using balance sheet financial statements provide apprehension into organization’s debts,

assets, and shareholder equity during a notable time frame. Usually company’s lists its assets

along the balance sheet’s left side, along the right side list liabilities and debts. However, along

the top of balance sheets lists assets, within the middle list debts, and along the bottom of the

sheet list shareholders’ equity.

Organization's balance sheets present the financial position upon the end of specified

dates. The balance sheet provides an organization "snapshot" of its financial position at a given

point (an instant or moment) in time. Because the balance sheet informs people of a moment in

time of an organization's financial position by date indication along the sheet heading, the sheet

allows people such as creditors to review organization’s assets and liabilities. This valuable

information assists bankers to determine if an organization qualifies for additional currency

lending and credit. Additionally balance sheets inform clients, customers, competitors,

government agencies, investors (current and potential), labor unions, management, and suppliers

on an organization’s status.

Using income financial statements provide an organization’s revenue earnings during a

specific time frame. Additionally income statements reflect secure income from organization’s

expenses and shareholder share earnings. Along the bottom portion of the income statement

displays the total earnings, losses, and often providing an annual record of revenue.

The income statement is a financial document that measures the financial performance of

an organization throughout a specified accounting period. The financial performance

summarizes how organizations incur expenses and revenue through operations and

nonoperational activities. Moreover, showing net profit or accruing losses throughout a specific

accounting period, which is usually throughout a fiscal quarter or annual period.

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Statement of changes in equity is a financial document that links the owner’s equity

amount within a business from the start of an accounting period to the end period. The statement

of changes in financial position reflects a particular end period of accounts. The statement of

changes in owners' equity provides information from both statement of changes in equity and

statement of changes in financial position.

Since 1987, the cash flow statement continues to complement the balance sheet and

income statement for organizations as a vital portion for financial reporting, recording cash

amounts, and cash equivalents entering and exiting an organization. The cash flow statement

allows investors to comprehend how organizations operate, derive its income and how it spends.

Additionally organizations use cash flow statements for business analysis.

Defining Accounting

Accounting is about individual and organization accountability. Defining accounting can

be broad in application and businesses. According to the University of North Carolina

Wilmington’s website (2012), “the American Accounting Association defines accounting as the

process of identifying, measuring and communicating economic information to permit informed

judgments and decisions by users of the information” (What is Accounting section, para. 1).

This definition suggests that accounting provides people vital economic information relating to

the economic and financial activities of organizations.

Accounting identifies and communicates the necessity for accounting information.

Communicating the need for accounting information varies through several different ways using

accounting communication methods such as accounting reports. The need for accounting

information requires comprehension prior to attaining accounting information. The majority of

organizations are accountable in one form or another for activities and actions taken.

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Organizations produce reports based on activities that reflect organizational objectives and

direction.

Two vast classifications of accounting information exist: financial accounts and

management accounts. Financial accounts aim accounting information toward external users.

Management accounts aim accounting information toward internal users. Although the type of

information reflecting from financial and management accounts differ, the underlying

information satisfies the user’s information inquiries.

Double-entry bookkeeping is an accounting system base on a set of accounts that

identifies and measures accounting information and records information as accounting

transactions. Measuring accounting information can be a complicating process involving

judgments concerning organization’s ownership of assets and liabilities. Double-entry

bookkeeping accurately measures how much an organization loses or profits within a particular

period and frequently demands subjective judgment for a conclusion.

Conclusion

Balance sheets show entity assets, stockholder equity, and liabilities according to report

date. Income statements show results of an entity’s financial activities and its operations

according to reporting period. Cash flow statements show entity's cash flow changes during a

reporting period.

Everyone is capable of preparing a financial statement, although majority of

organizations employ accountants to do the work. Accountants are able to discover

discrepancies and communicate benefits that experts only can help with such as avoiding

taxation, increasing an organization’s image, or allowing an organization to financially worsen.

Accounting and financial knowledge remains important because comprehending these

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disciplines provide the necessary tools to manage organization decisions effectively. Successful

operations remain accountable when managing organization finances.

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References

University of North Carolina Wilmington. (2012). Accountancy. Career center. Retrieved from

http://uncw.edu/career/accountancy.html

United States Securities and Exchange Commission. (2012). Beginners' guide to financial

statements. Retrieved from http://www.sec.gov/investor/pubs/begfinstmtguide.htm