Financial Statements in Accounting

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Subject Economics
Type Essay
Language 🇺🇸 US

The rapid rate of globalisation is one of the reasons that most organisations are aiming for perfection in their output products and services. This perfection will not be soundly achieved if proper decisions are not made. For most decisions to be made in the organisation, accounting procedures must have taken place. Accounting is therefore the process of managing the resources of a company in an effective manner such that profits as well as other objectives of the company are attained (Weygandt, 2008, p.21).

Accounting majorly involves the preparation of financial reports of the organisation which form the basis of the organisation’s data to rely on when making decisions. Some of the financial reports to be prepared include; budgets, cash books, cash flow statements, tax reports and the balance sheet just to mention but a few.

The Four basic Financial Statements

These financial statements correlate with each other on the basis of the accounting equation.

Income Statement

To begin with, the income statement which is prepared on an annual basis shows the profit or loss in gross or net form obtained by the organisation in the course of that year. It has been declared to be the core financial statement in any organisation. It is important is because the rest of the financial statements use data from this report in their preparation (Weygandt, 2008, p.32). A good example is the balance sheet which uses the net profit or loss obtained in a bid to balancing the accounting model. The cash flow statement also generates much of its data for calculation from this financial statement.

Balance Sheet

The balance sheet is also an important financial statement as it shows how much the organisation is worth as at a specific date by indicating its financial position. This is shown by giving a list of the assets, liabilities and the capital equity that the organisation has. It is the statement prepared after the income statement since it uses data from it. For example it borrows the retained earnings figure from the income statement which it uses to balance off the accounting equation.

Cash flow Statement

This is another basic financial statement though it is among the most tedious reports to prepare. It shows how much cash is available in the organisation to settle the short term liabilities like bills (Aceman, 2008, p.1). This is indicated by monitoring the flow of cash in and out of the organisation. It highly depends on the income statement and the balance sheet from which it gets its data to perform the analysis. Because of this, it is prepared in the end after the latter two.

Statement of Retained Earnings

Also known as a statement showing owner’s equity, it is prepared to show any alterations in the retained earnings of a given periodic year. Because of this, it is usually prepared after the income statement where it checks out if the earnings of that year have been retained or used for example in terms of dividends to the shareholders(Aceman, 2008, p.1).

Importance of the Financial Statements

Just as discussed above, financial statements are prepared for the benefit of the organisation and its stakeholders. They are thus prepared for both internal and external environments of the organisation. On completion of the financial reports by the accountant they are conveyed to the managers who use the information therein to make concrete conclusions and decisions about the progress of the organisation. Since the main objective of most organisations is profit generation, this can only be reflected through the financial statements (Aceman, 2008, p.1).

Before an investor decides on making an investment in an organisation, they have to know the real value of that organisation as at that time. This, they get from looking at the balance of the balance sheet which shows a list of all assets, liabilities, as well as equity. Also, having a look at subsequent income statements can give an indication if at all the company has been operating through losses or profits.

The creditors are important people in the organisation as they loan the organisation in times when it is not able to pay instantly. However, before giving out the loaned facilities the creditors have to approve that the organisation is in a position to pay. This is done by going through their recent financial statements from which they determine whether or not to issue credit.

Last but not least, the information from the financial statements is also important for the employees of that organisation. The employees need the surety that the organisation is in a position to pay them their dues. They also need transparency in their payment figures, for example, if the organisation is generating high profits with the aid of the employees it should be able to remunerate reasonable salaries. They only achieve this after examining the financial statements of the organisation.

References

Aceman, O. (2008). The Relationship between Financial Statements. Web.

Weygandt, J. Financial Accounting, Sixth Edition. copyright © 2008 John Wiley & Sons, Inc.

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EduRaven. (2022, March 22). Financial Statements in Accounting. Retrieved from https://eduraven.com/financial-statements-in-accounting/

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EduRaven. (2022, March 22). Financial Statements in Accounting. https://eduraven.com/financial-statements-in-accounting/

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"Financial Statements in Accounting." EduRaven, 22 Mar. 2022, eduraven.com/financial-statements-in-accounting/.

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EduRaven. (2022) 'Financial Statements in Accounting'. 22 March.

References

EduRaven. 2022. "Financial Statements in Accounting." March 22, 2022. https://eduraven.com/financial-statements-in-accounting/.

1. EduRaven. "Financial Statements in Accounting." March 22, 2022. https://eduraven.com/financial-statements-in-accounting/.


Bibliography


EduRaven. "Financial Statements in Accounting." March 22, 2022. https://eduraven.com/financial-statements-in-accounting/.

References

EduRaven. 2022. "Financial Statements in Accounting." March 22, 2022. https://eduraven.com/financial-statements-in-accounting/.

1. EduRaven. "Financial Statements in Accounting." March 22, 2022. https://eduraven.com/financial-statements-in-accounting/.


Bibliography


EduRaven. "Financial Statements in Accounting." March 22, 2022. https://eduraven.com/financial-statements-in-accounting/.