Financial Statements - Essay Example

However, the different groups use the various financial statements for different purposes. This essay focuses on the four types of financial statements identified above and their importance to internal users such as managers and employee as well to the external users such as investors and creditors. All the financial statements are useful since to individual as well as organizations whose decisions are affected by a company. The financial statement act as an indicator of how a company is performing.

Moreover, the statements can be used to predict the future of a company. Balance sheet, which is also, referred as the statement of financial position acts as an indicator of the financial status at a given time. Balance sheet assesses the assets (economic possessions possessed by the entity) and the liabilities (sources of financing) as well as ownership equity. The assets possessed by a company are either classified as current or fixed assets. Current assets can be converted into usable cash easily and include cash, marketable securities, inventory, and prepaid assets.

Fixed assets are not easily converted into cash and are awarded historical cost. Fixed assets include buildings, machinery, equipment, and land. Liabilities are those assets owed to creditors (Drake, Fabozzi, & CFA, 2012). Liabilities are categorized as current and non-current liabilities. Current liabilities include notes payable, interest payable, accounts payable, wages payable and taxes payable. On the other hand, non-current liabilities include bonds payable and mortgages payable. Equity is the proprietorship, partnership, shareholders, or stakeholder’s equity in a corporation.

Equity owners are claimants of the residue equity after creditors have been paid. Therefore, balance sheet acts as a record of resources owned by an entity and acts as a crucial tool used to evaluate the capability of a firm to meet long-term obligations. Comparative balance sheet is an example of balance sheet (Drake, Fabozzi, & CFA, 2012). Creditors are involved in offering credit, which is a risky practice. Therefore, balance sheets are important to creditors since they use them to assess the wealth possessed by individuals or firms and determine their capability of paying for liabilities incurred.

Creditors make use of other financial statements when providing loans to companies. In case companies file bankruptcy, the creditors make use of the information obtained from the various items to recover their money by liquidating the company’s assets (Drake, Fabozzi, & CFA, 2012). Income statement is another important form of financial statement that indicates the net income of a firm. The net income is calculated by subtracting the operating expenses from the revenue or fees earned. Therefore, income statement is reflective of the company revenue or income as well as expenditure.

Revenue is the inflows that a company obtains from its operations while expenses are the outflows that a company uses to create revenue. Net income of a company is obtained by adding the revenue to the gains less the losses and expenses. Income statement is thus indicative of the performance of a business (Drake, Fabozzi, & CFA, 2012). Statement of cash flows is a record of a company’s cash flow activities such as the investing, operating and financing undertakings. Statement of cas