Financial Statements: Role and Types Essay

Exclusively available on Available only on IvyPanda® Made by Human No AI

Four Types of Financial Statements

Financial statements are statements that are used to accurately represent a firm’s financial status. These statements are used by firms to show their activities to their investors, creditors and other stakeholders in an accounting period. There are four basic types of financial statements (Kline, 2007, p. 43).

  • A balance sheet is used to show the total assets a firm possesses and the total amount of liabilities it owes to other people and institutions.
  • An income statement is used to show the levels of revenue a firm has obtained after selling its products and services at a price higher than the production expense.
  • A statement of cash flow is used to show the inflows and outflows of cash in a firm which can help it to meet its day to day expenses.
  • A statement of shareholder’s equity shows the rise or fall in value of the shareholder’s stock within a specific phase.

Uses of Financial Statements

A balance sheet shows the total amount of assets and liabilities that are possessed by a firm. It shows the sum of assets, liabilities and the equity held by stockholders of a given firm within the period being reviewed. The unit of measure is usually in form of the currency that is used within the country where the firm operates. Fixed assets are long term assets and they include physical property such as land, vehicles, office furniture and equipment. Fixed assets are usually in form of tangible possessions a company has such as trucks, buildings and real estate.

Current assets are possessions that are in form of hard currency which can be sold within a short period of time. Liabilities are the debts a firm is supposed to pay back to its creditors. Current liabilities are debts that a company is supposed to repay within a short period of time (Kline, 2007, p.47). Fixed liabilities are the debts that a firm is supposed to pay within a long period of time. The stockholders’ equity is the quantity of investments that a firm gets from its shareholders to run its operations.

An income statement is used to show the quantity of money received and money spent by a firm within a given period. Revenue is money earned while expenses are the costs incurred during operations. Higher revenues and fewer expenses bring about profits while lower revenues and higher expenses bring about losses. Income statements are used to show how a firm has performed within a specific period of time. The final deductions that are made determine if the company has experienced a net loss or a net profit (Kline, 2007, p.56).

A statement of cash flow reports the cash that is coming in and going out of a firm. It shows the amount of cash that a firm has that can pay its expenses and run its operations smoothly. The amount of cash flow that exists in a firm is captured at the bottom of the statement. The statement looks at the money available in a firm that is necessary to run its core activities. The operating activities part shows the net income and the change in various accounts on the balance sheet. The investing activities section shows the amount of money that is set aside for investments by a firm (Kline, 2007, p. 58). The financing activities section shows the cash received and spent on a firm’s financial securities.

A statement of shareholders’ equity shows the changes that have occurred in the equity owned by shareholders of a firm. The sum of new stock together with the beginning balance is totaled to get the ending balance. The net income is totaled with retained earnings minus dividends paid out to get the ending balance (Kline, 2007, p.59).

Usefulness of Financial Statements to Internal Users

A balance sheet can help managers and employees to analyze if the company is taking a positive or negative direction. This makes them understand the financial position of a firm and the means to improve it. An income statement helps internal users come up with ways to reduce unnecessary costs to ensure revenues remain positive. A statement of cash flow makes internal users aware of the amounts of money that are coming in and going out of the firm. A statement of shareholders’ equity helps internal users keep track of a company’s stock value within the industry in which it operates (Pratt & Anthony, 2010, pp. 67-69).

Usefulness of Financial Statements to External Users

A balance sheet helps the investors and creditors of a firm to make a good estimation on its ability to make positive returns in its future operations. An income statement makes it possible for external users to analyze the profitability of a company and its financial strength. A cash ratio statement helps external users of a firm assess if the company is in a position to sustain its operations without interruptions. A statement of shareholders’ equity helps external users to evaluate the value of equity a company holds within a market (Pratt & Anthony, 2010, pp.73-75). All these financial statements are important to external users because they help them understand if a firm is on the right track.

References

Kline, B. (2007). How to read and understand financial statements when you don’t know what you don’t know what you are looking at. Ocala, FL: Atlantic Publishing Group.

Pratt, J., & Anthony, J.H. (2010). Financial accounting in an economic context, study guide (8th ed.). New York, NY: Wiley.

More related papers Related Essay Examples
Cite This paper
You're welcome to use this sample in your assignment. Be sure to cite it correctly

Reference

IvyPanda. (2020, June 2). Financial Statements: Role and Types. https://ivypanda.com/essays/financial-statements-role-and-types/

Work Cited

"Financial Statements: Role and Types." IvyPanda, 2 June 2020, ivypanda.com/essays/financial-statements-role-and-types/.

References

IvyPanda. (2020) 'Financial Statements: Role and Types'. 2 June.

References

IvyPanda. 2020. "Financial Statements: Role and Types." June 2, 2020. https://ivypanda.com/essays/financial-statements-role-and-types/.

1. IvyPanda. "Financial Statements: Role and Types." June 2, 2020. https://ivypanda.com/essays/financial-statements-role-and-types/.


Bibliography


IvyPanda. "Financial Statements: Role and Types." June 2, 2020. https://ivypanda.com/essays/financial-statements-role-and-types/.

If, for any reason, you believe that this content should not be published on our website, please request its removal.
Updated:
This academic paper example has been carefully picked, checked and refined by our editorial team.
No AI was involved: only quilified experts contributed.
You are free to use it for the following purposes:
  • To find inspiration for your paper and overcome writer’s block
  • As a source of information (ensure proper referencing)
  • As a template for you assignment
Privacy Settings

IvyPanda uses cookies and similar technologies to enhance your experience, enabling functionalities such as:

  • Basic site functions
  • Ensuring secure, safe transactions
  • Secure account login
  • Remembering account, browser, and regional preferences
  • Remembering privacy and security settings
  • Analyzing site traffic and usage
  • Personalized search, content, and recommendations
  • Displaying relevant, targeted ads on and off IvyPanda

Please refer to IvyPanda's Cookies Policy and Privacy Policy for detailed information.

Required Cookies & Technologies
Always active

Certain technologies we use are essential for critical functions such as security and site integrity, account authentication, security and privacy preferences, internal site usage and maintenance data, and ensuring the site operates correctly for browsing and transactions.

Site Customization

Cookies and similar technologies are used to enhance your experience by:

  • Remembering general and regional preferences
  • Personalizing content, search, recommendations, and offers

Some functions, such as personalized recommendations, account preferences, or localization, may not work correctly without these technologies. For more details, please refer to IvyPanda's Cookies Policy.

Personalized Advertising

To enable personalized advertising (such as interest-based ads), we may share your data with our marketing and advertising partners using cookies and other technologies. These partners may have their own information collected about you. Turning off the personalized advertising setting won't stop you from seeing IvyPanda ads, but it may make the ads you see less relevant or more repetitive.

Personalized advertising may be considered a "sale" or "sharing" of the information under California and other state privacy laws, and you may have the right to opt out. Turning off personalized advertising allows you to exercise your right to opt out. Learn more in IvyPanda's Cookies Policy and Privacy Policy.

1 / 1