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This test is about an informational presentation to a group of small business owners with no accounting or financial knowledge. It is a report that identify the audiences, purposes, and natures of financial statements and managerial reports. In addition, it will explain the use of financial accounting information in making informed and ethical business decisions.
Audiences, Purposes, and Natures of Financial Statements
Prior to decide the audience, purpose, and natures of financial statement, it becomes necessary the definition of the words. Financial statements are reports that show where the money is, where it comes from, where it goes, and where is now. It can be divided in four categories: Balance Sheets, Income Statements, Cash Flow Statements, and Statements of Shareholder’s Equity. These reports will be finding in the Security and Exchange Commission (SEC) and as a public record, if the business is a public business. Private business will send those reports to owners and lenders of that business. The objective of Financial Statement is to give the audience information about a company’s performance and financial position. They need to be reliable, comparable, relevant, and understandable to the audience. The audience must be willing diligently to study the information provided in the statements.
Balance sheets provide detailed information about assets, liabilities, and shareholder’s equity of a company. Assets are everything that a company owns that have worth-physical property, trademarks, patents, cash and investments. Liability is everything that the company owes, like rent, loans, money owed to suppliers, payroll, or taxes. Shareholder’s equity is the capital or net worth, or the money left over after the sale of all assets and the payment of all debts.
Income Statements are the reports of profits in a specific period, like quarterly, annually or monthly. It is all that rest after subtracted all costs. Managers and board of directors use them to determine the direction of the company. They are internal or external, and the internal is always more detailed and expansive than the external. Managerial accounting prepares internal financial statements to help managers plan, make decisions, and control business functions. Normally, these reports are confidential and not shared outside of the company.
Cash flow Statements report operating, which is an analysis of the cash flow from income or losses, investing, that reflect purchase or sales of assets, and financing activities of a company, which shows how monies come into a company, as sale of stocks or bonds, or out, as repayments of loans.
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The Shareholder’s Equity Statement is used to summarize the changes in owner’s equity accounts during the fiscal year that are the distribution of cash dividends, issuance of stock shares, buy of own capital stock shares, and report of gains and losses not covered in other parts of the financial reports.
Different audiences, for an assortment of reasons, use the financial statements. It can be employees to assess the value of their company when negotiating pay increases or to sign up for a 401K or to anticipate revenue from company profit sharing. Investors will use it to decide or not invest in a company, assessing the past performance and speculate what future revenue may be. Financial institutions will decide or not lend money to the company. Creditors may use for the same reason, which is loan additional money or collect on a past debt. Shareholders will use to decide or not to acquire or sell shares, the current and future value of those shares, or to assess the viability of the company.
Business managers and owners, CFO’s use managerial reports. Those reports allow them to make important executive level decisions. It can be used also to assess pricing, cost management, performance, and revenue or to evaluate, plan and control company resources. Those reports detail about the overall outlook of a company’s viability and are presented to stockholders as part of the Annual Report.
Government tax authorities will use both reports when assessing the tax liability of a company, when auditing or red flagging a company’s tax return.
Making Informed and Ethical Business Decisions
Those financial statements will help all audiences in making ethical and informed decisions. The way to maintain a long-term position in the market is to be aware of shareholder’s values and concerns. In adopting policies that maximize values in the market, the company can attract investments, provide local employment, and work with local leaders to make the relationship profitable for all.
Shareholders may use statements of a failing company to decide sell their shares. Managers may use the financial statements to notify employees about layoffs or close of the company, as well to show how good the company is doing and motivate the employees to keep the good work to have their share increased. Creditors may increase or rescind a line of credit based on the company’s report. Financial Institutions may use the statements to decide to loan money based on the company’s past performance.
Financial Statements provide information about the performance of a company, which will be used to develop business plans and short and long-term goals. They provide powerful information to all audiences when used together, and are the best tool for directing investments, wisely. Those Financial Statements are relevant to all companies when analyzing the past, projecting, and building the future. Through them, all companies, small or not, using efficiently, will increase the growth, and remain competitive.
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Tracy, J. A. (2005). Accounting for Dummies (3rd Ed.). Indianapolis, IN: Wiley Publishing, Inc
U. S. Securities and Exchange Commission. (2007) Beginners’ Guide to Financial Statements. Retrieved August, 2nd 2008 from http://www.sec.gov/investor/pubs/begfinstmtguide.htm