Basic Financial Statements

During this first week we have learned about basic financial statements. They are: Income statement, retained earnings statement, balance sheet, and a statement of cash flow. These four statements provide all of the relevant financial information for a business enterprise.

Income statements show a company how their revenue is transformed into the net profit. It will show the income for a specific time period, costs and expenses, and taxes. It is the best way for a manager or owner to see if they made or lost money during that period of time. One thing I learned that is important about income statements is that they represent an entire period of time, whereas a balance sheet (discussed later) represents a single moment in time.

Retained earnings statements (also called Equity Statements) sync up changes in the retained earnings accounting during a reporting period. The statement starts off with the beginning balance in the company's account, and then adds or subtracts things like profits and dividend payments, to calculate the ending retained earnings balance.

Balance sheets (also known as a statement of financial position). It is a snapshot of a company's financial position at the end of a certain time period (IE: end of the year, end of the quarter, etc). Since it is like a snapshot of their financial holdings, it allows lenders to see what a company owns and what a company owes. The balance sheet covers three main areas: assets, liabilities, and the owner's equity. It helps a bank; investor, etc. determine whether that company is worth the risk of a loan. This would also be helpful for some suppliers for companies, to determine whether or not they have to worry about getting paid for the supplies they deliver.

A statement of cash flow provides information about company's cash receipts and cash payments during a specific period. It "reports cash receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities of an enterprise during a period, in a format that reconciles the beginning and ending cash balances". Cash flow statements can also help a business predict future cash flows; show how a company's cash is used and where it comes from, ensuring that employees are paid and any loans or debt are paid.

Managers and owners depend on these financial reports to continue running the business smoothly and to make important business decisions. Many times a financial analysis will be conducted using the information contained in the financial statements. This is why it is so important to ensure that whoever is keeping record in the books understands what they are doing and is very thorough. These statements are also useful when looking at other companies to invest it. It shows their debt to equity ratio, and helps you decide whether to invest or abandon a sinking ship. It is also good for an employee to understand all of these statements,