Financial Statement Differentiation 1

Financial Statement Differentiation Paper

ACC/561

April 9, 2012

Karen Lascelle

Financial Statements 2

Financial Statement Differentiation

This particular assignment instructed the student to differentiate the four types of

financial statements. A company or business is responsible for maintaining all types of financial

statements in order to maintain a successful organization. These statements are also used to

ensure correct recording and accounting of all types of financial transactions. Although each of

the four financial statements serve a specific purpose, the statements are generally prepared in

conjunction with one another. The following sections will discuss the four types of financial

statements which are the income statement, balance sheet, statement of cash flow, and retained

earnings statement. Additionally the student will discuss which financial statement, or

statements, would be of most interest to investors, which financial statement, or statements,

would be of most interest to creditors, and which financial statement, or statements, would be of

most interest to management.

Income Statement

An income statement is a financial statement that measures a company's financial

performance over a specific accounting period. Financial performance is assessed by giving a

summary of how the business incurs its revenues and expenses through both operating and non-

operating activities. It also shows the net profit or loss incurred over a specific accounting

period, typically over a fiscal quarter or year ("Entrepreneur.com",2012). All expenses and

incomes are reported in this particular statement. For example, if any specific sales were made

by the business is an financial gain or income while any amount paid for acquisition or inventory

or raw material is treated as and expenditure in the balance sheet statement.

Financial Statements 3

Balance Sheet

The balance sheet is also another important piece of information that is needed to run a

successful organization and to perform an accurate business analysis. A balance sheet is a

financial statement that summarizes a company's assets, liabilities and shareholders' equity at a

specific point in time. These three balance sheet segments give investors an idea as to what the

company owns and owes, as well as the amount invested by the shareholders. The balance sheet

must follow the following formula: Assets = Liabilities + Shareholders' Equity

("Entrepreneur.com",2012). By including this information on current assets and current

liabilities in the balance sheet, a business, company, or organization can judge its short term

liquidity position, which is, the organizations ability to pay short term financial responsibilities.

This particular statement would generally be of interest to investors and creditors.

Statement of Cash Flow

According to Entrepreneur.com, a statement of cash flow is an accounting statement

which shows the amount of cash generated and used by a company in a given period. It is

calculated by adding non-cash charges (such as depreciation) to net income after taxes. Cash

flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as

an indication of a company's financial strength (2012). The elements of this particular statement

are generally divided into three wide categories. The categories include cash flow from daily

operations, investing and financing activities. This report would generally interest owners and

members of management.

Retained Earnings Statement

The statement of retained earnings is a statement that is produced to determine the

changes in the amount of the total retained or maintained earnings over a period of a particular

Financial Statements 4

month, quarter, or year. This specific report is prepared to determine the final value of retained

earnings at the end of a specified year. Because the retained earnings symbolize the part of the

net profit which is not paid to the shareholders in the form of net income, it makes it especially

important to compute the balance amount of income which is reinvested in the company.

Conclusion

A company or business is responsible for maintaining all types of financial statements in

order to maintain a successful organization. These statements are also used to ensure correct

recording and accounting of all types of financial transactions. Although each of the four

financial statements serve a specific purpose, the statements are generally prepared in

conjunction with one another. As discussed in the preceding paragraphs, the income statement,

balance sheet, cash flow statement, and retained earnings statement all have their specific

purpose and identity in financial reporting. It is imperative the business owners, shareholder,

creditors, investors, and all stakeholders alike understand the functionality and importance of

each report.

Financial Statements 5

References

Entrepreneur.com.(2012). Retrieved from

http://www.entrepreneur.com/encyclopedia/term/82202.html