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Financial Statements and their users

Every business require to keep records of the transactions it has conducted over the period of time in order to determine the overall financial health and viability of the business. In other words, the going concern ability of an enterprise is largely depends upon how an enterprise performs and that performance is assessed through preparing financial statements. Besides determining the financial performance of the firm, financial statements are also prepared in order to secure financing from different lenders as most of them would require analyzing the financial strengths of the firm before lending.

(Cleaves, 2005). Types of financial statements There are four types of financial statements which a firm prepares to assess its financial performance. These financial statements are: Balance Sheet Income Statement Cash Flow Statement Changes in Owner’s equity Balance Sheet If a person wants to know what is the exact financial position or health of an organization, Balance sheet is the Statement which provides that answer. Balance sheet present the total assets, liabilities and equity of the owner at a given point in time mostly at the end of financial year.

A typical balance sheet is divided into two parts i. e. Assets and Liabilities. On the assets side of

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the balance sheet, all the assets of a firm are accounted for at their historical value. The assets shown are however, divided into two broad categories of Fixed assets and Current Assets. Fixed assets include such assets whose economic benefits will incur to the business for more than one year whereas current assets are those assets of the firm which are consumed within one year. (Stickney & Weil, 2004).

It is important to understand that listing of assets into balance sheet is based on the nature of the assets i. e. current assets are shown first and than the next items according to the nature of their liquidity. The principal is that the more liquid asset will be shown first and than the next liquid assets. The liabilities and owners’ equity side of the balance sheet indicates the liabilities as well as the owners’ equity of the firm. The liabilities are classified into current as well as non-current and are based on the same classification as the assets i. e.

current liabilities are shown first and than the non-current liabilities. The owners’ equity of the firm indicates the actual funds invested by the owner into the business as well as the accumulated profits as well as other reserves of the business. Income Statement Income Statement is also names as Profit and Loss Account and indicates the profit earned or loss incurred during a particular period of time- usually for during the period of one year. Income Statement lists all the sources of revenue of the firm and than deduct all the expenses incurred on generating that revenue.

The net results indicate the total income or loss made by the firm during that period. It is however, important to mention that the reporting period of the Income Statement may be less than one year i. e. 3 months, 6 months etc. however, most of the countries have set the legal requirements for the businesses to prepare income statement at least once a year. (Wild, Larson, & Chiappetta, 2007). Cash Flow Statement Cash flow statement indicates the movement of cash within three broader activities i. e. operating activities, Investing Activities and Financing activities.

Cash flow from operating activities outlines how much cash has been used or generated from the operating activities of the firm. Cash from operating activities is usually generated through selling to customers i. e. cash sales, receivables as well as any other non-cash activities such as depreciation and amortization etc. Cash can however be used in paying back the suppliers, employees, taxes etc. The net result of the outflow and inflow of cash from operating activities therefore determine either there have been positive cash generation or negative cash generation i.

e. outflow exceeds inflow. Cash flow from investing activities is usually spent in making capital expenditure such as purchasing any fixed asset. Similarly, cash flow from financing activities is generated/used from either obtaining funds from external sources or invested by the owners/shareholders themselves. Changes in Owners’ Equity Statement of changes in owners’ equity indicates the changes made in the equity of the owners during a period of time.

For any investment made by the owner in the form of equity introduced and subsequent income earned by the business adds up to the owners’ equity and any losses or withdrawals reduce the equity. The most significance of this statement is the fact that it allows an opportunity to reconcile the opening and beginning equity of a firm and as such tracks the changes made over the period of time. (McGrann, 1998). Users of Financial Statements There are different classes of users who use the financial statements for different purposes.

The shareholders would require these statements in order to ascertain the financial viability of the firm and as such these statements provide them an insight into whether the future investment is to be made or not. Government agencies may require such statements because of accurately assessing the tax liability of the firm. Similarly, financial institutions may require them for their analysis purposes before making any lending decisions. So the above memo was basically intended for giving a brief overview of what are some of the financial statements and who can use them according to their own requirements.

Bibliography 1. Cleaves, C. H. (2005). Business Math (8th Edition ed. ). Upper Saddle River, NJ: Pearson Prentice Hall. 2. McGrann, J. (1998, April 3). Change in Owner’s Equit. Retrieved Feb 25, 2009, from Pescat: http://agecoext. tamu. edu/fileadmin/Rural_Entrepreneurship/Enterprises/Aquaculture/Pescat_Software/8ownrequ. pdf 3. Stickney, C. P. , & Weil, R. L. (2004). Financial Accounting. New York: Thomson South-Western,. 4. Wild, J. J. , Larson, ,. K. , & Chiappetta, B. (2007). Fundamental accounting principles. New York. : The McGraw-Hill Companies/Irwin.

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