Financial Statements Purpose, Essay Example

Pages: 1

Words: 1153

Essay

Abstract

Financial statement is a sheet containing trivial information on the financial status of a company. The paper will talk on the various types of financial statements, discuss them in depth indicating their benefits and its ease of use. At a distance, users are able to view the profits of the company. Financial statement is beneficial in that, it can predict loses or profits the company is making, and this prevents the company from reaching bankruptcy level. It is an exceptionally essential document even to the competitors, in that, they can use it to test the stability of a company and see if they can be able to challenge it. They are prepared for a stipulated period.

Introduction

Financial statement is beneficial to the company employee and its stakeholders. It defines the company’s strength and weakness. They are done in summaries way and   tabulations readable and understood by all. It is used as a communication tool in the company thus, setting up the targets of the company. It also determines the organization’s physical condition and steadiness. It shows how the day-to-day running of the business, the stakeholders can use the information to check how their employees are using the resources provided, and if they are following the right accounting procedures. The government agencies use the financial statement to know how to tax the company correctly. It is also beneficial because it only uses numbers in stating the status of the company thus, hides the actual status of the company. Also, used to measure how often the company turns inventory into revenue.  Using the day-to-day sales made by the organization, will add up to the total sales of the month. As a result, used to check against the expenses of the month and be able to know the revenue of the company.

Financial statements show how much profit organization is making, and checks the company’s assets against the expenses. These are the returns on the company’s assets. It shows how much money the company has made in a specific day. This will be of much help when checking the company’s reliability. The cash at hand will indicate the company’s liquidity, which is of much importance to the creditors and shareholders. The shareholders use it as a decision making tool by comparing and analyzing the data in the statement. Additionally, used to determine funds that are not in use now, and be set aside for other use or if it is a banking institution, used to give out loans to members or employees. It is important to a sales company since it can be used to check the current marketing trends and thus change or maintain the status of the company.

The four types of financial statements are balance sheets, income statements, cash flow statements, and statements of shareholders’ equity. The balance sheets show the assets and liabilities of the companies at a fixed point in time. Income statements show the income earned and the expenses incurred over a certain period of time. Cash flow statements paint a picture of the liquidity position of the companies, and the statements of shareholders’ equity tell us about the combined ownership interests of the companies’ shareholders (U.S. Securities and Exchange Commission).

The balance sheet tells the reader about the assets and the liabilities that support the company’s day-to-day operations. In other words, the balance sheet helps us understand the capital structure of any organization. These assets and liabilities have been gathered to make it possible to stay in business. The income statement focuses upon the operating efficiency and the profitability of the company. It tells us how well the company has been utilizing its resources to perform its routine tasks. The cash flow indicates the ability of the company to meet its short-term and long term obligations and investment needs. The cash flow statement is important because income is not always a reliable indicator of the overall liquidity of an organization, and without adequate liquidity, the company could even go out of business.

As far as investors are concerned, they may be most interested in the balance sheet and the cash flow statement. The balance sheet helps the investors determine the overall value of the company and who are the financial stakeholders in the company. When an investor invests in a company, he is becoming a part owner of the company. Balance sheet guides the investor regarding the price he should pay even though different investors may reach different valuations due to different assumptions and preference for accounting methods. Balance sheet also tells about the capital structure of the organization and, thus, helps the investors better understand the implications of a capital structure employed by a particular organization. Cash flow is important because income statement often masks the true financial performance of the company through creative accounting but it is difficult to do so in the cash flow statement. Cash flow shows the income that is actually converted into cash and the ability of the organization to meet short-term and long-term debt obligations and investment needs.

The financial statements most important to creditors may be balance sheet and cash flow statement. Balance sheet will help the creditors determine the existing financial leverage of the organization, and whether it may be able to meet additional principal and interest obligations. Balance sheet also makes the job easier because it gives information on both short term liabilities such as accounts payables (HomeBased411) and long term liabilities. Similarly, the ability to pay interest payments is better determined by liquid assets such as cash rather than sales or profits which are recognized even when the actual payment has not been received.

The management may be interested in balance sheet and income statement. Balance sheet is important because the right capital structure allows a company to obtain better terms on credit funds and is also important for the long-term future and competitiveness of the company. The income statement is important because it allows the management to monitor the operations and identify areas in which it may be doing well as well as those that could be hurting the overall profitability.

In conclusion, financial statement is a very important tool for making both short-term and long-term decision regarding the company. Each Company should ensure that their financial statement is done well. This ensures it is detailed with all requirement indicated to be able to help one make a judgmental decision especially for internal use. We have learnt of the many types of financial statements, its benefits and how they can be used differently to bring out the financial status of a given company. They are important for internal and external uses. It is commonly used by senior managers of accompany, but the preparation is by the junior staff who knows the daily outputs of their company

References

HomeBased411. (n.d.). What Do Lenders Look For? Retrieved May 21, 2012, from http://www.homebased411.com/money/lender-considerations.php

U.S. Securities and Exchange Commission. (n.d.). Beginners’ Guide to Financial Statements. Retrieved May 21, 2012, from http://www.sec.gov/investor/pubs/begfinstmtguide.htm

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