Fundamentals of Financial Statements
Starting a business requires much time, commitment and patience. The ultimate goal of most businesses is to be professionally and financially successful. In order to show the progress of the business operations, meticulous financial statements must be kept. This statement communicates economic information about the business to individuals involved in making decisions and judgment. According to the University of Phoenix 2006, "An entity's financial statements are the end product of a process that starts with transactions between the entity and other organizations and individuals."
Connie Rochce started a cookie business in November 1986. Developed was a business plan and place people to assist. Connie was concerned, needed was someone to maintain the financial accounts. Aunt Connie's Cookies, financial statement for November and December are reviewed along with a suggestion to expand her operation.
The transactions in Connie's financial statement addressed the balance sheet, income statement and statement of cash flows. Reviewed will be a few transactions in the balance sheet and income statement. Connie's initial transaction of depositing $80,000 into her account to start her business increased her property. This transaction increased the company's equity and was added to balance the account. According to the University of Phoenix (2006), "the balance sheet is sometimes called the statement of financial position because it summarizes the entity's resources (assets), obligations (liabilities), and owners' claims (owners' equity)". Kitchen and office equipment were purchased along with supplies. With theses three transactions she also increased her property. Purchasing the supplies increased her debt but still added value to the operation of the business. Meeting her obligation of the first sale increased revenue, this was shown in the income statement. This statement will show Connie whether the business is operating at a profit or loss. Greta (1998) stated the following:
The balance sheet can show how financially sound a company is. The income statement can answer every investor's central question: "How much money are they making?" Even more important, the income statement can provide a solid basis for forecasting future profits.
If Aunt Connie was seeking a loan to expand her business the financial statement can show income in advance. Aunt Connie can, in good faith, accept a future order from a client. Connie can show this transaction as income received in advance and a liability under unearned revenue. During the process of balancing the books the income received in advance would be entered as an adjustment.
The balance sheet displays the status of an entity at a specific time. Contrary to the balance sheet, income statements and statements of cash flows cover periods over time. These two forms provide the information on why the balance sheet has changed. To receive the information that contributes to the changes related to a change in retained income, the income statement will provide a detailed summary. To receive an explanation of the events that lead to modifications in cash, received and paid, the statement of cash flows will be utilized to provide that information (Horngren, 2014, p.
Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).
Financial statements are essential to the success of a small business. Financial statements have a value that goes far beyond preparing tax returns or applying for loans, and can be used as a roadmap to steer you in the right direction and help you avoid costly breakdowns (U.S. Small Business Administration [USSBA] 2014).
Financial statements are those statements which provide information about profitability and financial position of a business. It includes two statements, i.e., profit & loss a/c or income statement and bal...
• Accounting (financial) statements for a period of several years. The statements include the balance sheet and profit and loss account, in addition, cash flow statement, capital and the annex to the financial balance.
...e an income statement needs to be looked at to show if the business is making a profit and if the expenses are too high or what has change in revenue from year to year. This is just an example of many other sources need to be looked at before deciding on the financial position of the entity.
Financial statements are formal records of a business’s financial activities. These statements provide an overview of a business' financial condition in both short and long term.
Financial Statements and Notes on Financial Statements: This is the most important section for any user of the annual report. Greencore started this section with the company’s 2014 and 2015 Income Statements. These statements give us information regarding Greencore’s sales revenues, its cost of sales, operating costs, income before tax, data about the company’s taxation, its net profit for 2 years, and Earnings Per Share. The readers can get an idea about the company’s profitability for the last 2 years from these statements. Next we have the ‘Group Statement of Recognised Income and Expense.’ Then there are the 2014 and 2015 Balance Sheets of the company. The balance sheet works as the mirror of the company. It portrays the exact financial condition of the company at the end of the year. The side-by-side presentation of 2 years’ balance sheets gives the users an idea about where the company is improving and it is lagging behind. Greencore’s balance sheet gives us an idea about the company’s liquidity, its capital structure, and its financial strengths and weaknesses. After that, we have the Cash Flow Statement, which illustrates the company’s cash inflows and outflows through its operating, investing, and financing activities. This statement reveals how liquid the company is, and how capable it is to meet its short-term obligations. There are some other financial statements like the ‘Statement of Changes in Equity’ presented in this section that provides the users with additional information . Finally, we have the notes on financial statements part that shows us what kind of accounting practices (accrual or cash basis) the company has been following, what accounting and financial reporting policies and standards it has been following and implementing, and how the company is adhering to the recognised accounting and financial reporting
The balance sheet is used to report the financial position, including amount of assets, liabilities, and stockholders’ equity of an accounting entity at a specific point in time. It includes the name of the entity, title of the statement, specific date of the statement, and units of dollars. The accounting entity should also be precisely defined (Bethel, 2011).
There are three standard sections and they are investing activities, operating activities and financing activities (Melicher, Norton, 2013). Investing activities will report change in a company’s cash position resulting from losses or gains from investments in operating subsidiaries and financial markets as well as changes in amount of money that is spent on the capital assets like equipment and plants. Operating activities are calculated by adding depreciation and EBIT then subtracting taxes. Operating activities is the money a company earns from regular business activities like selling goods, manufacturing goods or providing a service. Financing activities that track a company’s external activities that help a company raise capital and repay investors, an example of this is cash dividends, issuing more stock or changing loans. It will show investors how strong a company is
The income statement is a simple and straightforward report on the proposed business's cash-generating ability. It is a score card on the financial performance of your business that reflects when sales are made and when expenses are incurred. It draws information from the various financial models developed earlier such as revenue, expenses, capital (in the form of depreciation), and cost of goods. By combining these elements, the income statement illustrates just how much your company makes or loses during the year by subtracting cost of goods and expenses from revenue to arrive at a net result -- which is either a profit or a loss.
As we already know, financial statement is the most important aspect that every company should have as a reference for any decision making in term of loan, project, operation and other related matters. Because management of any business requires a flow of information to make informed, intelligent decisions affecting the success or failure of its operations. Investors need statements to analyze investment potential Banks require financial statements to decide whether or not to loan money, and many companies need statements to ascertain the risk involved in doing business with their customers and suppliers. Because of these reasons, it is essential to have comparability and consistency on financial statement for decision making process then lead company to perform well in their business and boost the profitability as well.
Income statement-: Income statement is the financial statement that measures a company 's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
Balance sheet is a financial statement which is widely used by accountants for businesses. Balance sheet is also known as the statement of financial position because it helps us to present company’s financial position at the end of a specified period. (fresh books, 2016)
Financial statements provide an overview of a business' financial condition in both short and long term. They help in understanding the past performance of the company and making future predictions about the company. It thus helps us to look beyond the profit figures.