The Four Financial Statements

The four financial statements are formal records of the activities of a company, person or business entity. The four financial statements are balance sheets, income statement, statement of owner's equity, and statement of cash flow. This paper will identify the four basic financial statements and describe the purpose for each.

The balance sheet reports assets and claims to assets at a specific point in time is a statement of financial position at a given point in time (Kimmel, Chapter 1, Balance Statement, 2009). The fundamental accounting model is assets equal liabilities plus equity. A company's assets can be put into two different classes, current assets, and fixed assets. Current assets are assets that quickly and easily can be converted into cash, most of the time it is at a discounted rate from the purchase price. A couple of things are included in current assets such as cash, accounts receivable, securities notes receivable, inventory on hand, and prepaid assets such as pre-paid insurance. A couple of the things are classified as fixed assets include land, buildings, and equipment. Such assets are recorded at historical cost, which means that the value of it is much lower than market value. Liabilities represent the port of the assets that are owned by creditors. Liabilities can be classified as short-term liabilities and long-term liabilities.

The income statement reports the success or failure of the company's operation for a period of time (Kimmel, Chapter 1, Income Statement, 2009). The income statement presents the results of the company or entity for a certain period of time, such as five-year period. The simplest equation to describe income is net income is equal to revenue minus expenses. Income statement is also referred to as profit and loss statement. The income statement should help investors and creditors determine the past financial performance of the company. It should also help predict the future performance and assess the capability of generating future cash flows through report of the income and expenses. People who invest in the stock market have become very familiar with the income statements of the company's that they are buying stocks in. If a company has a huge income statement more people are likely to buy their stocks over a company who has a poor income statement that does not show any growth.

The statement of owner's equity details the changes to the owner's equity account during the accounting period as the organization issues dividend payments and retains money for use within the organization for investment (Fuentes, 1999-2012). The statement of owners' equity is simply explained as you have to reconcile the previous equity balance with withdrawals or payments, investments and income of the current period and then you get the owner's current statement of equity (Fuentes, 1999-2012). This report is a valuable tool also to see if a