The Four Most Important Financial Statements Essay Example for Free

The Four Most Important Financial line of reasonings EssayWhat ar the four most important mo earnary relations? Briefly describe each Much success in todays business world is laced in with numbers in the form of account and financial statements. Being able to understand and properly read these statements is a critical comp 1nt in truly knowing a business and properly assessing its overall financial performance. Financial reporting is the issuance of written documents in the form of the financial statements by the companies to the shareholders, stakeholders and other interested parties. The objective of these financial statements is to provide information about the reporting entitys financial performance and position that is useful to the capacious range of users for assessing the stewardship of the entitys care and for making economic decisions. To be useful, this information must be represented faithfully, should be complete, prudent and free from material errors at leas t. The purpose of imposing regulations on accounting practices and setting standards is to fulfil the objectives of financial statements.In the accounting world there are several financial statements but the four main financial statements that are universally understood and prepared for most publically traded companies and many small and medium sized businesses are the income statement, the balance public opinion poll, the statement of specie flows, and the statement of retained network (sometimes referred to as shareholders equity). A fundamental ability to properly interpret the information these statements contain allows internal and external users to make a wide array of decisions affecting company operations and decisions on whether or not to invest. Users of financial statements look to the income statement to learn and assess a companys performance over a set period of time, often a month or a year.This statement depicts the companys revenues and expenses with the differen ce reflecting the last income (or loss) resulting from the firms business activities. The revenue will be broken down by the category from which it derived with expenses broken down in a equal fashion. Those most interested in a companys income include shareholders, potential investors, banks (for the purpose of assessing past performance and potential loan risk), creditors, and executives charged with ensuring profitableness for the business. The complexity of an income statement will vary based on that of the company from whence it derives and the depth of its business activities (www.accountingcoach.com). In larger corporations an accrual basis ofaccounting is commonly used where revenues are recorded when the money is actually earned, as opposed to cash being received.Income StatementA firms revenues, gains, expenses and losses are listed on the income statement. Revenue is money earned from a companys normal business operations. The expenses on the income statement are the c osts associated with earning the revenue. When a company sells one of its assets, it can experience a capital gain or loss. Revenues minus expenses, plus gains minus losses, equal net income or net loss. The dollar count of net income listed on the income statement is also found on the cash flow statement under the operating activities section.Balance SheetThe balance sheet includes the elements of the accounting equation assets equal liabilities plus shareholders equity. The assets on a balance sheet are classified as either current or stock-still assets. Current assets are the most liquid, meaning they easily convert to cash. Fixed assets are long-termed assets. Similar to assets, liabilities are also classified as current or long-term. Current liabilities include money owed to creditors in less than a year. Long-term liabilities are due in one year or later. Shareholders equity is the entire amount of equity in the firm. The shareholders equity section of the balance sheet is explained in further detail on the statement of shareholders equity.Cash Flow StatementThe cash flow statement shows the amount of cash within a company. Items that affect the cash balance are listed on the statement. The first section of the cash flow statement is operating activities, which shows the cash flowing in and out of the company in relation to its business operation. The operating activities section also includes net income and the change in dollars of certain accounts listed on the balance sheet. The next section, investing activities, shows cash the company received and spent on a companys capital investments. The finance activities section shows the inflows and outflows of cash related to the companys issued financial securities, which is also listed on the balance sheet and statement of shareholders equity.Statement of Shareholders EquityThis statement shows the changes in the shareholders equity account. The first line item is the beginning balance for common stock . The amount of newly issued common stock is added to the beginning balance to get the oddment balance. The same goes for preferred stocks. Listed next is the beginning balance to retained gain, which is also listed on the balance sheet. The net income listed on the income statement is added to the beginning retained earnings balance and the amount of dividends paid out to shareholders is subtracted to get the ending balance. The ending balance for common and preferred stock and the ending balance for retained earnings is added together to get the total of the shareholders equity.