Financial Statement Differentiation Paper

876 words - 4 pages

Financial Statement Differentiation Paper

Financial Statement Differentiation Paper
Financial statements arrange financial information into statements that prove to be the financial accounting backbone. The income statement, statement of cash flows, retained earnings statement, and balance sheet arrange the expenses, liabilities, revenues, and assets of a company into formats that provide a clear view of different areas of interest. These areas are of interest to the investors, creditors, and management of the company (Kimmel, 2011). All four of these financial statements prove to be of interest to all three financial statement users in multiple ways. ...view middle of the document...

A company’s net income, determined through the income statement, allows for investors to predict future net incomes through past net incomes, providing them with the information needed when deciding to buy and sell stock. Profitability ratios, such as earnings per share, give investors the ability to determine their investment return. The statement of cash flows helps investors to analyze the cash position of the company. A retained earnings statement allows investors to evaluate the dividend payment practices within the company. The net income from the incomes statement and the retained earnings from the retained earnings statement are used to form a statement of stockholder’s equity, which reports the changes within stockholders’ equity accounts. Provided to investors through the balance sheet is the solvency of a company (Kimmel, 2011). According to Kimmel (2011), solvency is the company’s “ability to pay interest as it comes due and to repay the balance of a debt due at its maturity.”
Income statements allow creditors to predict what future earnings could be. This allows them to determine whether or not the company will generate enough profit to repay the loan. The statement of cash flows shows creditors how the company’s cash is being used. Creditors are able to monitor the dividend payments made by the company through the retained earnings statement. The ability to repay debts is reduced by the amount paid in dividends. A balance sheet is analyzed by creditors to determine the likeliness of loan repayment, determined through liquidity and solvency. Liquidity is measured by determining the working capital and current ratio. Solvency refers to the company’s ability to pay interest as well as repay the loan maturity amount on a long-term loan. Solvency ratios, such as...

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