The Purpose of Accounting and Financial Statements

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The Purpose of Accounting and Financial Statements Introduction Accounting deals with financial transactions between a firm, its employees, customers, suppliers, and owners as well as bankers and various other government agencies. Financial statements provide managers with essential information they need to evaluate the liquidity of an organization. This is the firm's ability to meet current obligations and needs by converting assets into cash, the firm's profitability, and its overall financial health. The balance sheet, income statement, statement of owner's equity, and statement of cash flows provide a foundation on which managers can base decisions. Of the four financial statements only the balance sheet is considered to be a permanent statement, its amounts are carried over from year to year. The income statement, statement of owners' equity, and statement of cash flows are considered temporary because they close out at the end of each year. The data provided in these statements communicates the appropriate information to internal decision makers and to interested parties outside the organization ("The Four Financial Statements," NDI). Financial Statements The Balance Sheet A balance sheet provides detailed information about a company's assets, liabilities and shareholder's equity. The balance sheet is based on the following accounting model: assets equal liabilities plus equity. Assets are the things a company owns that have value. Liabilities are amounts of
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