Principles of Accounting I ACC205
December 6, 2010
Importance of the Financial Statements
In this paper I will talk about how important the financial statements are and why they need to be accurate for the outside business interests, and why they are not important for lenders and other outside investors.
The first thing we should ask you what is a financial statement? Financial statements “are business documents that report on a business in monetary terms” (Hornger & Harrison 2007, pg.17). All financial statements are essentially historically documents. The most common financial statements include the balance sheet, the income statement, the statement of changes of financial position and the statement of retained earnings. These statements are used by management, labor, investors, creditors and government regulatory agencies, primarily. The financial statements tell what has happened during a particular period of time. The financial statements hold “companies accountable for how money is earned and spent, down to the very last detail” (Lawrence, A., 2006). A lot of companies use the financial statements to make their business decisions and concerned it will also predict what might happen in the future of a company.
Financial statements are prepared immediately after the adjusted trial balance. If one knows how to record transactions, do a trial balance and make adjusting entries it gives the person a better understanding of the information the financial statements contain. The financial statement “summarizes the transaction data into a form that’s useful for decision making (Hornger & Harrison 2007, pg.19). The financial statements are Income statement...
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...t only for themselves but also for the Government and IRS. The IRS uses financial statements to determine how much an entity is required to pay in taxes. The financial statements are only as good as the information that is backing them up. One would find that keeping accurate financial records, when backed up with complete accounting record it will help a company plan better, for tomorrow and for many years to come.
Corporate Narc (n.d.) Overview of Enron Scandal. Retrieved from http://www.corporatenarc.com/enronscandaloverview.php
Horngren, C. & Harrison W. (2007). Accounting (7th ed). Upper Saddle River, NJ: Pearson Prentice Hall.
Lawrence, A., (2006, April 6). Why Financial Statement Are Important: A Beginner’s Guide. Retrieved from http://www.articlesbase.com/management-articles/why-financial-statements-are-important-a-beginners-guide-21381.html
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