Financial Statement Differentiation - Essay Example

Financial ment Differentiation Financial ment differentiation Introduction Financial ments refer to records used in business in needs of recording their transactions and track their financial condition and performance. Keeping of financial records dates back to over 5000 years ago when merchants of the ancient Babylonian kingdom between rivers Tigris and Euphrates recorded sales, expenses, and inventory using cuneiform writing on clay tablets. Over the centuries, this improved to the current means of financial statements that are more accurate, efficient and with no bias.

They help, when analyzed in good faith, to evaluate the financial condition of the underlying company; the results of this help in making decisions that improve the running of the business and in its future. Financial statements. The balance sheet. The balance sheet represents the assets and equities owned by a business. The assets represent what the business owns; equity, also known as net worth, refers to what is left over for the shareholders after what it owes is deducted. Balance sheet shows the company’s financial position as of the date on which compiled and changes radically depending on the financial transactions taking place each and every day.

A series of balance sheets shows the basic financial structure and the debts at various points in time. However, it does not reflect how the business is doing financially, whether it is meeting its costs of operations or if it is making profits. It may be arranged horizontally or vertically, current to fixed accounts or fixed to current accounts (Costales & Szurovy, 1993). The income statement. This is a record, which brings out the ability of a business to make money over a period. It records all the incomes collected from the business while deducting all the expenses for that period to come up with the net income and the profit of that certain period.

However, if expenses exceed total income, the total loss can be calculated. This financial statement has a drawback such that not all incomes and expenses items are in cash form. For example, depreciation is accepted as expenses and others as incomes before cash flows into the company by accepting accounting principles (Woelfel, 1993). The cash flow statement. This is a record that gives the amount of cash generated by the business over a certain period. The cash outflows are subtracted from the cash inflows for that period in order to get the net cash generated.

This gives the profit made after meeting all expenses or, if net cash position is negative, the company is using reserves to cater for the remaining expenses. If this negative position continues, the company will run out of money. Hence, the cash flow statement shows whether the business makes a profit or not and the financial position of the business (Woelfel, 1993). The reconciliation of net worth statement. This is a record that shows and reflects various changes in the net worth of business at various time intervals within a financial reporting period.

It shows the amount of increase or decrease in net worth either net income or net loss. It also shows the amounts of distributions made to shareholders or the additional funds invested in the business by shareholders within that financial period (Costales & Szurovy, 1993). Conclusion. Investors need financial statements in order to find the information they need to make decisions, which relate to their interests in a company. They need income statement and the reconciliation of net worth statement to inform them of daily business operations and gains.

The creditors need to know about the company’s ability to meet its obligations, reasons for a company’s borrowing, and how it has handled its debts. Hence, creditors need balance sheets and income statements to determine abilities of a business to meet its costs. The management of the business needs all these statements in order to carry out the business successfully and to make profits. Hence financial statements are useful to the successful running of the businesses. References Costales, S. B. & Szurovy, G. (1993). The Guide to Understanding Financial Statements.

London: McGraw-Hill Professional. Woelfel, C. J. (1993). Financial Statement Analysis: The Investors Self-Study Guide to Interpreting & Analyzing Financial Statements. London: McGraw-Hill Professional.