Lenders have no use for the Income statement and the Balance sheet with information relating to past transactions or events for making decisions unless they are accurate.
The Balance sheet is a “statement at one point in time, which shows all the resources controlled by the entity and all the obligations due by the entity.” (Bazely, 2007, p90) Hence it merely provides an outline of the financial strength and asset liquidity of an entity.
The Income statement “summarizes certain transactions that take place during a period of time.” (Bazely, 2007, p125) Hence the income statement provides some of the basic financial information for rational decisions to be made.
Lenders are “people and organizations who lend money in order to earn a return on that money.” (Bazely, 2007, p8) Therefore they are interested in ensuring whether the entity is going to provide with a return due to the entity making sufficient profit.
Therefore even if the balance sheet and income statement provides financial information relating to past transactions or events, lenders will not include the balance sheet and income statement in making decisions as many limitations of these statements affect the decisions to be made.
Lenders are interested in the entities controlled resources and what it owes. Therefore the limitations of the balance sheet clearly affect the accuracy of the statement. These include: the representation of the position of an entity at one particular point. The statement is only relevant at that particular point in time; the utility of the statement diminishes as time passes for providing relevant measures of assets and liabilities of an entity as the values assigned are usually historical cost; and, the valuation method of assets need to be appropriately measured as certain cases lead to an incorrectly stated figure.
Lenders use a variety of approaches to arrive at a lending decision. Therefore the accuracy of the income statement limits the decisions made by lenders. First, the organizational structure, size and type of activity limit the accuracy of the statement as it affects what is being reported and how it should be reported which may omit certain important aspects of the organization. Second, the income statement is normally prepared for internal use by an organization with which these internal reports are generally more detailed than the reports produced for external users, limiting sufficient accuracy of information needed to make a decision.
Even though companies develop balance sheets and income statements they are mainly for internal use.
The balance sheet provides a snapshot of a firm’s financial position at a specific point in time, by using the company’s Asset and Debit Equity.
The balance sheet displays the status of an entity at a specific time. Contrary to the balance sheet, income statements and statements of cash flows cover periods over time. These two forms provide the information on why the balance sheet has changed. To receive the information that contributes to the changes related to a change in retained income, the income statement will provide a detailed summary. To receive an explanation of the events that lead to modifications in cash, received and paid, the statement of cash flows will be utilized to provide that information (Horngren, 2014, p.
Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).
Financial statements are essential to the success of a small business. Financial statements have a value that goes far beyond preparing tax returns or applying for loans, and can be used as a roadmap to steer you in the right direction and help you avoid costly breakdowns (U.S. Small Business Administration [USSBA] 2014).
Data on the income statement includes quarterly (one-year) time range and discloses the costs and revenues of the company, net income and deductions from it in the reserves, the payment of dividends and so on. From these data it is possible to obtain information about the value and dynamics of the value of output, its cost and the financial condition of the company and for the previous reporting
“The objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.”
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
A bank balance sheet is different from that of a typical company. Explain the difference A balance sheet is a financial statement which shows the states of financial affairs of a particular business at a particular point in time. The balance sheet discloses the assets, liabilities and equities of the business at a particular point in time. A Bank balance sheet is a typical statement of financial position of the bank. Bank balance sheets are substantially different from company balance sheets, which summarize the net assets of a company by subtracting total liabilities from total assets to arrive at total equity. Many of the differences between the assets and liabilities of banks and those of other companies lie in the ways they are recorded
“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
As we already know, financial statement is the most important aspect that every company should have as a reference for any decision making in term of loan, project, operation and other related matters. Because management of any business requires a flow of information to make informed, intelligent decisions affecting the success or failure of its operations. Investors need statements to analyze investment potential Banks require financial statements to decide whether or not to loan money, and many companies need statements to ascertain the risk involved in doing business with their customers and suppliers. Because of these reasons, it is essential to have comparability and consistency on financial statement for decision making process then lead company to perform well in their business and boost the profitability as well.
Financial statement is the summrerized of ledger accounts organized in such a manner as to show the profit or loss of business for the accounting year and the financial position of the business at the end of the accounting year. Financial statement helps the management to assess the performance or progress of the concern and to decide upon the course of action to be taken in future.
Balance sheet-: Balance sheet is a statement at the book value of all of the assets and liabilities of a business or other organization present a particular date such as the end of the financial year. It is known as a balance sheet because it reflection accounting identity the components of the balance sheets. The balance sheet must follow the following formula:
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.
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 are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently."