THE FIRM FINANCIAL STATEMENTSName:

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Financial statements assist the different stakeholders of a business know the performance of their business investments through financial position, cash inflows and out-flows, as well as other pertinent performance indicators. The information disseminated by financial statements is crucial to many parties in identifying the need to divest,re-invest,tax, and alter strategy.

The income statement is part of a large number of financial records that report the financial position of a business organization. In fact, income statements report the organization’s financial position, its performance, and changes in this particular performance. This information is particularly useful for a wide range of users who primarily use it to make financial decisions (Kimball, 2012).

The expense account is the statement of expenses where each entry corresponds to an expense category account from the accounting systems’ charts of accounts. Some of the major types of expenses shown on this financial record include;

Expenses for the cost of goods sold. This represents the cost of expenses associated with producing goods or the delivery of services. It includes; direct materials for manufactured goods.

Operating expenses. These include; stores, maintenance, and advertising costs.

Operating expenses,under general and administrative. These include; costs of research and development, and costs of training and travel.

Financial expenses that include; loan original fees and interest paid on borrowed funds.

Extraordinary fees, include; workforce reduction fees such as golden handshakes, and sale of significant assets, or the business.

The balance sheet is a financial statement or record that creditors and potential investors use to determine the financial position of an enterprise by analyzing what it owns and owes. In the balance sheet, we find two types of assets; current assets and fixed assets. The former represents the key assets the business used up during a 12 month period that does not necessarily represent the next 12 months. These include; cash in savings, cash in checking, inventory, and cash at hand. The latter group of assets represents the cumulative amount of assets that the firm intends to use for more than the coming 12 months. These include; land, buildings, accumulated depreciation, furniture and fittings, as well as equipment. The balance sheet’s part that is representable for the creditors’s view, or liabilities, are called the liabilities side (Way, 2011). It has, the notes payable, amounts payable, total current liabilities, owner’s equity, long term liabilities, and common stock.

The three accounts that comprise the owner’s equity on a standard balance sheet include;

Paid-in-capital. This is the amount of cash contributed by shareholders in exchange for stock shares.

The retained earnings, which represent the net income of a corporation from inception to the day balance sheet becomes less the dividends from inception to to date of earnings.

Treasury stock, representing the amounts of money that are equivalent to the corporation’s own stock purchased from the stockholders.

The statement of cash flows, or simply the cash flow statement , is a record of the cash and cash equivalents entering, or leaving the company.It helps the investors understand better how the company’s money is entering, leaving, and how operations are running.

The cash flow statement is divided into three parts;

Core operations. This part quantifies the cash inflows and outflows caused by major business operations. Changes made in the accounts receivable,depreciation, accounts payable, and depreciation are recorded in this section.

Investing part of the cash flow statement records the changes in investment such as equipment and assets.

Financing part of the cash flow statement represents the changes in loans,debts, and dividends. This makes it cash in capital is raised through whatever method and cash out when dividends are paid out.

The major importances of financial statements are;

They communicate the different financial conditions to their respective parties. Investors would like to know if their investments are getting used in the right way, ot if they will get return on investments.

Financial statements show the operational results of financial activities over a given period of time.

Financial statements display changes in shareholder’s equity over given time periods. This is an important piece of information, especially to investors as they follow their investment performance.

Conclusion

As has been seen, financial statements are the best way for both stakeholders and shareholders to analyze the performance of different investments they make. In addition, potential shareholders also make the decision to invest, or not to, based on this information. Therefore, financial investments are a major part of financial decision-making processes.

References

Kimball, T. (2012, May). The Three Parts of a Cash Flow Statement | Chron.com. Retrieved from http://smallbusiness.chron.com/three-parts-cash-flow-statement-43816.html

Way, J. (2011, October). What Is the Importance of a Company’s Financial Statements? | Chron.com. Retrieved from http://smallbusiness.chron.com/importance-companys-financial-statements-21332.html