The Role of the Main Financial Statements - Term Paper Example

The paper "The Role of the Main Financial Statements" is an excellent example of an essay on finance and accounting. The financial statements are prepared at the conclusion of the accounting cycle. The normal accounting cycle is for a period of one year.

Publicly traded corporations are mandated by the Securities and Exchange Commission (SEC) to release an annual report each year which among other things it must contain the financial statements of the firm. Most public firms publish financial statements in each trimester. Ever since the creation of the Sarbanes Oxley Act the financial statements of public firms must be audited by an independent auditor. This act also raised the accountability of the statements by making the executive officers including the CEO liable in case of fraud.

  The income statement is a financial report that analyses the profitability of a firm. The income statement at the top shows the revenues a firm generated during an accounting period. Revenues are the most important metric for companies because they provide the money that is used for operating expenses and other business costs. The last output of the income statement is the net income generated by a company. Users of financial information pay close attention to the income statement because this report provides information regarding the operating results of a firm including whether a company had gains or losses.

When a company has net losses for more than one accounting period the firm may run out of business and file bankruptcy. All financial statements including the income statement are prepared by accountants following the generally accepted accounting principles (GAAP). The employees of firms are often interested in the income statement because many compensation packages such as employee bonuses are calculated based on information derived from the income statement. The second major financial statement is the balance sheet.