Financial Statement Differentiation
Financial Statement Differentiation A Financial Statement can be defined as, “Summary report that shows how a firm has used the funds entrusted to it by its stockholders (shareholders) and lenders, and what is its current financial position” (Business Dictionary, 2011). The Financial information is required for various users to make an informed Decision. “The purpose of financial information is to provide inputs for decision making” (Kimmel, Weygandt, Kieso, 2009, Para 1, p. 6).
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There are four different parts covered in a Financial Statement; those are Balance Sheet, Income Statement, Retained Earnings Statement, and Statement of Cash flow. The assignment will elaborate the purpose of each statement and differentiate its utility for different users. Balance Sheet “The balance sheet reports assets and claims to assets at a specific point in time” (Kimmel et al. , 2009, p. 14). The Balance sheet gives the exact money value worth of the assets over the liabilities of the company as of the specified time mentioned.
The Balance sheet formula is “Assets = Liabilities + Stockholders’ Equity” (Kimmel et al. , 2009, p. 14). The various resources possessed by a business such as property, cash, and equipment are Assets. Liabilities include the company’s payables to creditors and owners; the owner capital is also-called as Owner’s equity. A public company publicizes its Balance sheet to the general public. The creditors and investors use this statement to decide if they will invest in or lend to this company. The investors will see the likelihood of their money being repaid by the company.
Income Statement The Income Statement is also-called a Profit or Loss statement. As the name infers the statement shows if the company has made profit or loss during the specified time. “The income statement reports the success or failure of the company’s operations for a period of time” (Kimmel et al. , 2009, p. 12). The Income Statement consists of Expense and Revenue, the difference between the Revenue and Expenses determines the Net Profit or Net Loss. “Expenses are the cost of assets consumed or services used in the process of generating revenues” (Kimmel et al. , 2009, p. 11). Revenue is the increase in assets resulting from the sale of a product or service in the normal course of business” (Kimmel et al. , 2009, p. 11). So if the expenses are more than the revenue earned the company made a loss and if the Revenue exceeds the expenses it made a Net profit. Lenders like Banks, credit association, and other investors use the Income Statement to see the company’s performance and determine if it can repay the money and if it is worth investing. The Income statement also helps the internal team to determine if the expenses are well covered by the revenue generated.
For example a new Advertisement cost is $12000 for last quarter and Revenue did not move any further than it was before the Advertisement. Then they should rethink about continuing that Advertisement strategy. Retained Earnings Statement “Retained earnings are the net income retained in the corporation” (Kimmel et al. , 2009, p. 13). When a business makes profit it can decide to retain the earnings for business expansion or pay the owners back as dividend. The Retained Earnings statement shows the total Income, less the dividend paid to owners to determine the retained Earnings.
The investors look at this statement to see usual dividend payment practice of the business. Some investors like companies paying the owners and some investors do not like these. This is because the dividend paid will bring down the company’s ability to pay the creditors. Statement of Cash Flow “A statement of cash flows is to provide financial information about the cash receipts and cash payments of a business for a specific period of time” (Kimmel et al. , 2009, p. 15). The cash flow statement shows how the cash has been utilized in the business operation, financial, and investing activities.
This means the Statement of cash flow will show the amount of cash used in different ways such as in operation of business, investing, and Financing activities. The Investors and creditors can see how the liquid cash has been handled. The internal team uses the report to know the current cash position. To summarize, Investors, and creditors depend on the various financial statements to make investing decisions. The Internal team uses these financial statements to understand their current position and uses this as a measure for their performance. This will help both internal and external users to make decisions.