September 16, 2013
In any business, the financial statements are the backbone of the financial accounting reporting within the business. The four financial statements include the income statement, balance sheet, retained earnings statement and the statement of cash flows (Kimmel, Weygandt & Kieso, 2010). These four statements provide a summary picture of the overall financial health of the company, for the period of time reported, to both internal (managers and employees) and external customers (investors and creditors). The internal and external customers can use the company’s reported financial ...view middle of the document...
Creditors use the income statement to predict future earnings of a company, as this is useful in making a decision to loan a company money or offer a line of credit (Kimmel, Weygandt & Kieso, 2010). The net income will help determine the amount of a loan or credit line that a company is given.
The example below illustrates the data shown on an income statement (Kimmel, Weygandt & Kieso, 2010).
The balance sheet is a detailed snapshot that reports a company’s financial health at a specific point in time (as noted in the header of the balance sheet). The details within the balance sheet are the assets (cash, accounts receivable, owned equipment, and prepaid insurance) and the liabilities and stockholders’ equity (liabilities include notes and accounts payable, salaries, unearned revenue, interest payable, and stockholders’ equity which includes common stock and retained earnings) of the company (Kimmel, Weygandt & Kieso, 2010). The liabilities are claims of creditors, while the stockholders’ equity are claims of owners (Kimmel, Weygandt & Kieso, 2010). The total amount of assets must equal the total amount of liabilities and stockholders’ equity. The example below illustrates the data shown on a balance sheet (Kimmel, Weygandt & Kieso, 2010).
Managers and employees utilize the balance sheet for two puposes; the first is to determine whether the amount of cash retained to meet the company’s daily cash needs, the second purpose is to evaluate the relationship between the company’s debt and the amount of stockholders’ equity to ensure that there is a satisfactory proportion of debt and common stock financing (Kimmel, Weygandt & Kieso, 2010).
Retained Earnings Statement
The retained earnings statement reflects how much net income is retained by a company. This statement is particularly important for a company as the information helps management determine the amount of cash available for further expansion of the company. On the retained earnings statement, dividends paid are subtracted from the net income listed in the income statement, thus totaling the retained earnings for the period listed in the header of the retained earnings statement (Kimmel, Weygandt & Kieso, 2010). For a company that does not pay dividends, the retained earnings would equal the net income listed on the income statement.
For a company that offers stock...