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Importance of financial statement
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Fundamentals of Financial Statements
Starting a business requires much time, commitment and patience. The ultimate goal of most businesses is to be professionally and financially successful. In order to show the progress of the business operations, meticulous financial statements must be kept. This statement communicates economic information about the business to individuals involved in making decisions and judgment. According to the University of Phoenix 2006, "An entity's financial statements are the end product of a process that starts with transactions between the entity and other organizations and individuals."
Connie Rochce started a cookie business in November 1986. Developed was a business plan and place people to assist. Connie was concerned, needed was someone to maintain the financial accounts. Aunt Connie's Cookies, financial statement for November and December are reviewed along with a suggestion to expand her operation.
The transactions in Connie's financial statement addressed the balance sheet, income statement and statement of cash flows. Reviewed will be a few transactions in the balance sheet and income statement. Connie's initial transaction of depositing $80,000 into her account to start her business increased her property. This transaction increased the company's equity and was added to balance the account. According to the University of Phoenix (2006), "the balance sheet is sometimes called the statement of financial position because it summarizes the entity's resources (assets), obligations (liabilities), and owners' claims (owners' equity)". Kitchen and office equipment were purchased along with supplies. With theses three transactions she also increased her property. Purchasing the supplies increased her debt but still added value to the operation of the business. Meeting her obligation of the first sale increased revenue, this was shown in the income statement. This statement will show Connie whether the business is operating at a profit or loss. Greta (1998) stated the following:
The balance sheet can show how financially sound a company is. The income statement can answer every investor's central question: "How much money are they making?" Even more important, the income statement can provide a solid basis for forecasting future profits.
If Aunt Connie was seeking a loan to expand her business the financial statement can show income in advance. Aunt Connie can, in good faith, accept a future order from a client. Connie can show this transaction as income received in advance and a liability under unearned revenue. During the process of balancing the books the income received in advance would be entered as an adjustment.
The purpose of an income statement is to report the revenue generated and the expenses incurred by a corporation for the past year. (Melicher, 2014) The gross revenue is the first item on the financial statement followed by several expenses and then the net revenue. One of the expenses a corporation incurs is the cost of goods sold, which is the amount of money it costs a corporation to produce or manufacture the items sold to generate a profit. The second expense on a financial statement is the cost of record keeping, preparing financial statements, advertising, and salaries grouped under the heading “Selling, general, marketing expenses”. The other expenses on an income statement are depreciation, interest expense, and the unavoidable income tax. (Melicher, 2014) Once all of these expenses haven been deducted from the gross revenue a company has an accurate depiction of their net
...e an income statement needs to be looked at to show if the business is making a profit and if the expenses are too high or what has change in revenue from year to year. This is just an example of many other sources need to be looked at before deciding on the financial position of the entity.
Information from the income statement and the balance sheet are used to calculate financial ratios that are useful when making investment decisions.
The income statement provides investors an insight about how well the company’s business is being operated and if the company is earning decent amount of money. The figure below includes Domino’s Pizza’s revenue, expense and profit during the past 5 years.
The statement displays the relationship of the net income to the changes in the cash balances. It is important to understand that cash balances can wane despite an increase in net revenue (Horngren, 2014, p. 674). The statement also aids in the evaluation of management’s use of cash and management’s generation, defining a company’s capability to pay dividends and interest to pay debts when the time comes to pay them, and forecasting upcoming cash flows (Horngren, 2014, p. 674). The balance sheet displays the status of an entity at a specific time. Contrary to the balance sheet, income statements and cash flows cover periods over time.
Joanne uses an accounts receivable subsidiary ledger to see the customers who have bought on credit from Joanne’s Party Supplies. This allows her to keep track of customer payments and concentrate on getting payments from debtors with overdue payments. By having details of the accounts receivable activity in a subsidiary ledger, Joanne is able to better control her business’ financial information. It includes a separate account for each customer who makes credit purchases, and the combined balance of every account in this subsidiary ledger equals the balance of accounts receivable in the general ledger. This is essential to Joanne’s Party Supplies because it provides Joanne quick access to each customer’s balance and account activity. At the end of each
Ethics within any industry and organization is vital for its success. When those ethics have been compromised, it can be detrimental to the organization. Within the health care industry, it is vital they adhere to the ethical standards that have been established by the federal and state governments. For ethical standards to be followed, the health care executives are responsible to establishing policies and procedures. Understanding the financial aspects of the health care organization such as, where exactly does health care spending goes and how to reduce the inefficiencies and financial waste within the system is also important. This paper will address the financial reporting practices and ethics within
Income statements also show Earnings Per Share (EPS). EPS shows how much money shareholders would receive if all of the net earnings for the period were distributed. (A highly unlikely occurrence; they’re usually reinvested.)
A consolidated financial statement can be defined as the financial statements of a parent and its subsidiaries combined to form a single economic entity (AASB 10, 2011). The entity, which acquires the other entity, is known as the parent and the entity, which has been acquired, is known as the subsidiary. Consolidation financial reports arise when one entity purchases another entity, to then form a group.
The balance sheet is a financial document which identifies the company’s assets and liabilities of a company. By deducting the assets from the liabilities the net worth is calculated, this is a key indicator of the value of the company to its owners.
The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years.
The statement of the financial position is also known as balance sheet has shown the accounting equation, Assests = Liabilities + Equity. The statement of the financial position shows the current assets, liabilities and equity owned by a business during an accounting period.
Income statement-: Income statement is the 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.
Balance sheet is a financial statement which is widely used by accountants for businesses. Balance sheet is also known as the statement of financial position because it helps us to present company’s financial position at the end of a specified period. (fresh books, 2016)
Financial statements provide an overview of a business' financial condition in both short and long term. They help in understanding the past performance of the company and making future predictions about the company. It thus helps us to look beyond the profit figures.