Financial Statements as an Important Part of Business - Essay Example

Financial ments are an important part of any business because they help to determine how a company is currently doing financially and thus what business decisions need to be made for the future of the company. 

However, liabilities aren’t all bad because they can be used to pay for assets. Aside from liabilities, stockholders’ equity can also be used to finance a business. The accounting equation (assets = liabilities + stockholders’ equity) must always balance. As such, funds for new assets must come from one of the liabilities or stockholders’ equity but not both. Unlike the balance sheet, the income statement provides a snapshot of how productive a business is at any given time. An income statement is usually used for a fixed time period, either one month or one year.

The income statement contains two main categories: revenues and expenses. Revenues are any funds that come into a business, while expenses are anything that goes out. The key purpose of an income statement is to find out the net income of the business. This is calculated by subtracting expenses from revenues. Investors are concerned with the net income of a company because it can show if a business is profitable or not. The retained earnings statement is linked to the income statement in that the net income is added to the retained earnings statement.

From this amount, some of the net income is paid out to shareholders as dividends. However, in most circumstances, a company would retain a significant portion of its net income in order to reinvest it in the business. Investors are interested in the retained earnings statement of a company because it can tell them how committed the company is to its long-term growth. Finally, a statement of cash flows is primarily used to show where cash came from and how it was spent. There are three main activities where cash can be derived from (1) operating activities, (2) investing activities, and (3) financing activities.

Investors are concerned with the statement of cash flows because they want to see how a company chooses to spend its cash. Also, a company that has very little cash on hand is perhaps not a wise one to invest in. Comparative statements can be completed for any of the above financial statements. This can be done by comparing the data of two time periods side by side. Comparative statements are useful for determining how well a company is doing financially compared to a previous time period.