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Financial Statements: Role and Types Essay


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.

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

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

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