Financial Statements Paper

Financial Statements Paper

The principle for this paper is to define the purpose of accounting and to identify the four basic financial statements, Balance Sheet, Income Statement, Cash Flow Statement, and the Retained Earnings Statement. Integrated into paper will be explanations on how these statements interconnected to each other and how the internal and external users benefit from them.

The purpose of accounting is to provide a financial information system or insight into learning and understanding the numbers produced by a company. Information systems help to identify, record, and communicate the economic events that occur in an organization. These three activities need to occur in order for accounting to work properly.

Accounting Activities

An organization must identify their economic events for example, sales of a product, manufacturing of equipment or producing new inventory. Recording of the events of moneys earned and spent, in chronological order helps to measure the financial stability of the business. This process is normally done by a Bookkeeper whose only job is to record the economic events into various business ledgers. Last, communicating the economic events from the collected data produces accounting reports. In following these processes, financial statements are created, and are available for the users to analyze and interpret the data. Analyzing and interpreting the data is a very important part of communicating the events. It involves giving a clear explanation of the reported data and any limitations for to its users.

Types of Financial Statements

The four financial statements created from the summarized accounting activities for the internal and external users of a company:

* Income Statement presents the revenues and expenses for the company along with the results of either a net gain or net loss for a specific period.

* Retained Earnings Statement is a summary of the changes that occurred for a specific period.

* Balance Sheet reports the reports the in assets, liabilities, and stockholders' equity a specific date.

* Cash Flow Statement is a summary of the cash inflows and outflows for a specific period.

These statements are created and prepared in this sequence for financial recording reasons. Three of the financial statements represent data at a specific period, but only one represents data at a point of time, the Balance sheet. The Balance sheet reports on a specific date.

Interrelation of Financial Statements

The first financial statement created is the Income Statement, which computes revenue and expenses, and results in either net income or net loss at