Financial Statement Differentiation Essay

898 words - 4 pages

Financial Statement Differentiation
Vaughan Thompson
ACC/561: Accounting
March 4, 2013
Venetia N. Pitts, MBA

Financial Statement Differentiation
It is difficult to envision investors, creditors, and management making informed decisions sans accurate financial information. Consequently, organizations should use financial statements to communicate their financial stability, cash flows, and operational results with external and internal users. The purpose of this paper is to explain information contained in each of the four financial statements and discuss reasons each statement is of interest to investors, creditors, and management.
Literature Review
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Net income from this statement helps to generate a retained earnings statement.
Retained Earnings Statement
The retained earnings statement, usually the most concise, shows alterations to retained earnings and paid-in capital during a period. Financial Accounting posits, “Retained earnings are increased by the amount of net income and decreased by dividends to stockholders (and by any net loss for the period)” (2011, p. 54). A business retains its net income, also called retained earnings. Retained earnings link the income statement to the balance sheet.
Balance Sheet
The balance sheet is a snapshot of company assets and financial obligations (Sherlock & Reuvid, 2005). This sheet reflects the basic accounting equation: assets = liabilities + stockholder's equity (Peavler, 2013). Assets are the resources a company owns or controls, liabilities are amounts said company owes, and owners’ equity is assets minus liabilities. The equation means organizational assets must balance with its liabilities plus owners’ equity; hence, the name ‘balance sheet.’ Changes in the balance sheet items explain variations in cash flow.

Statement of Cash Flows
Statements of cash flows show how cash affects a company’s operating, investing, and financing activities during a specified period. This statement reconciles balance sheet cash changes from one years’ end to the following years’ end (Financial Accounting, 2011).
A position as investor, creditor, or management plays a key role in determining which financial statement is of interest to stakeholders.
Stakeholder Interests
Investors would show significant interest in three statements because they provide pertinent information to help make investment decisions. Past net income is a good predictor of future income, so investors buy or sell stock based on such predictors. To help make investment decisions, investors could use retained earnings to monitor dividend payment practices. Investors should also show a keen interest in cash flows to ensure management is managing cash properly and not selling...

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