Commercial enterprises are in the business of making money. This endeavor may be served by producing widgets, providing resources, services, or any other number of possibilities. While businesses may have differences in what they do to generate revenue, they all share a need to accurately reflect their financial situation. This information is critical to business management, business strategy, their shareholders (present and future), and in credit transactions. Companies utilize financial statements to report their financial health. These documents include income statements, balance sheets, and cash flows. Together they provide insight into the firm’s financial health.
An income statement is intended to display a firm’s revenue and
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Balance sheets help determine a firm’s financial standing and can gauge future capability, for example a firm flush with debt is not positioned to invest into a new product or facility.
A balance sheet reflects two broad categories of information, assets and liabilities. Both of these can be broken down into more specific types of asset or liability. For example, types of assets include: current assets, inventories, accounts receivable, fixed assets (such as buildings), long term assets, etc. Liabilities are figured as current or long term obligations. These can include accounts payable, various debts, income taxes, wages, etc (Melicher, p.359-360). A balance sheet also reflects owners’ equity.
Owners’ equity refers to the investment into the firm by the firm’s ownership and is reflected on the balance sheet as the difference between total liabilities and total assets. Owners’ equity can range from cash injections to materiel components, such as equipment or facilities. Owners’ equity may also be increased by directing the firm’s profits back into itself, as an investment. There are three types of accounts that make up owners’ equity, these are preferred stock, common stock, and the retained earnings accounts. Preferred stock is stock that provides investors with a fixed dividend, payable at a priority
In accounting there is much to be learned, about the financial aspects of a business. In the past five weeks I have learned the importance of financial reports and how they relate to the success of an establishment. These reports may include balance sheets and income statements, which help accountants and the public grasp the overall financial condition of a company. The information in these reports is really significant to, managers, owners, employees, and investors. Managers of a business can take and deduce financial
A balance sheet gives an overall picture of a company's financial situation by showing the total assets of a business, including liabilities plus equity. Current assets can include cash, accounts receivable, inventory and prepayments for insurance. The balance sheet is used by investors to get an idea of what the shareholders have invested, including
taxes, wages) or amount owed. Equity is also known as owner’s net worth, stockholders’ equity, etc. or amount vested with no obligation to payback. This difference is known as the net asset or net worth of the company
The balance sheet (BS) is significant to a business due to its ability to provide a “snapshot” of a company’s assets and liabilities at any given time. This financial document is a cursory representation of a business’s health. The use of comparative BS whether it be yearly, quarterly, or monthly provides the interested parties a tool to observe trends that are positive, negative, or neutral to a company’s financial health (Finkler, Jones, and Koyner,2013) .
The accounting equation: Assets = Liabilities + Owner’s Equity. Assets are the resources of the company. Examples include cash, land, buildings, and equipment. Liabilities are “outsider claims”, the company’s obligations to creditors. Examples include accounts payable, notes payable, and income taxes payable. Owner’s Equity represents “insider claims” of the company or the owner’s share of the assets. If a business is keeping accurate records this equation should always be in balance.
Understanding the finances of a company is important but knowing the significance of the financial statements is crucial to the operations as well. Reviewing the statement of financial position, operating statement and statement of cash flows serve as a guidance to management and executives on the day-to-day activities of an organization (Finkler et al., 2013). For example, the statement of financial position (balance sheet) shows the assets and
Asset Account – Can be organized into current and non-current category. Types of current accounts would be goods owned by a company with the result of selling items or a written note(s) receivable, in which a promise is made to repay services rendered. A non-current item is any item used for the efficient running of a company such as equipment like computers. This referred to as a fixed asset. (MyAccountingCourse.com, n.d.)
Among the tools required for every business to survive and thrive, the ability to maintain a regular self-examination holds an indispensable place. The size of the business in question is almost of no consequence, only the potential complexity of the self-examination changes. A prime tool for such self-examinations is the family of related financial reporting that has become nearly universal in western businesses: the income statement, the balance sheet, and the statement of cash flows. This trio of reports enables management and owners to carefully examine the holdings and liabilities of their business so they may make
Separately, the balance sheet reports a company’s financial position while the income statement reports a company’s fiscal year profits and losses. The balance sheet measures a company’s financial position by reporting its assets, liabilities, and owner’s (shareholder’s) equity. The income statement measures a company’s financial performance by reporting its revenues, expenses, and net income/loss. When combined, they serve two vital purposes: (1) expand the accounting equation and (2) enable analysis using ratios to determine industry position or potential material misstatements. The increase or decrease in owner’s (shareholder’s) equity on the balance sheet is a direct result of the net
The Balance Sheet is another type of financial statement used by a company to see a snapshot of the company's financial position at a particular point in time. It lists the value of the company's assets followed by its liabilities. A balance sheet can be summed up by a simple equation:
This is the source of the value of the company to its stockholders and to the stock market analyst (Yahoo Finance, 2013). The Balance Sheet may also indicate a negative Shareholder Equity which means the shareholders are losing money. The Balance Sheet also illustrates the trends in borrowing the company has used in the last year. The long term debts that are listed on the balance sheet compared to assets may indicate a problem if the debts are called in by the loaner for some unforeseen reason. There are multiple methods or ratios for determining the future profitability of a company indicated by the line items on the balance sheet (Mertz.J., 2000).
This income statement tells how much money a company has brought in (its revenues) how much it has spent (its expenses) and the difference between the two (its profit). The income statement show’s a company’s revenues and expenses over a specific time frame. This statement
Explain the nature of balance sheets. A balance sheet is one of the major financial statements that a company prepares so that its investors and managers have visibility into the company’s financial position. The balance sheet details a company's resources and obligations. The major parts include assets, liabilities and shareholders' or owners’ equity. The balance sheet is run for
The balance sheet of a company reflects exactly what a company owns and what it owes to others, making it a very important thing to be considered for stock investment.
Balance sheets and income statements are a snapshot of a company’s stability and financial situation. Combined the statements show the income, expenses, and stockholder’s equity in the company. These statements are often analyzed by financial institutions when a company comes to them needing a loan. Stockholders and other investors also look at these statements to make sure their investment will return a profit for them. This paper will look at four different companies and their balance sheets and income statements. The companies are Eastman Chemical Company, Covenant Transportation