Running Head: FINANCIAL STATEMENTS
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Accounting is the process that financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties (Price, Haddock, & Brock, 2007). The information from the accounting information is communicated through the four basic financial statements: the Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows.
The purpose of accounting is to identify, record, and provide all activities that affect the organization financially, and communicate the financial ...view middle of the document...
Some of the decisions that are made, with the use of accounting information, are how much inventory should be carried, and if pay increases is affordable. Managers also consider what products should be eliminated and which products are more profitable than others (Weygandt, Kimmel, & Kieso, 2008).
The employees use accounting information to know if cutbacks or increases to pay will occur. The employees want to know how stable his or her job will be. If the organization is making a large profit then employees will demand pay increases. If the organization is losing money then the employees may look for a job elsewhere. Some organizations have employee participation in continuous improvement programs. These programs involve the employees with business operations and financial information. Employees who are members of labor unions use the financial information to negotiate wages and benefits (Price, Haddock, & Brock, 2007).
External users, investors, use the financial accounting information to decide when to buy, hold, or sell stocks (Weygandt, Kimmel, & Kieso, 2008). Investors look at the Income Statement to see if the company is earning an income so the investment will have a return on investment. A question that most investors ask when reading financial statements is if the company is earning enough income to make the investment worthwhile. When a company has a loss or low income investors will either trade or sell the stocks of the company. If the company has a profit then the investors will hold their stocks or buy more. Future investors look at the profit of a company to decide if buying the stock produces a return on investment.
Creditors look at the financial statements of an organization to estimate the risk of lending or offering credit to the company (Weygandt, Kimmel, & Kieso, 2008). The company's profitability, debts, and assets show the creditors what collateral can be used to secure the loan or line of credit. The cash flow of the organization shows the creditors that the organization can repay the debt. The interest rate, the amount of the loan, and if a loan should be granted, are all compiled from the financial statements of an organization (Price, Haddock, & Brock, 2007). The income statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash flows all show the creditors the financial condition of the company.
The income Statement shows the income from fees, sales, and other sources of income for a business. The expenses are itemized and shown on the income statement. The expenses of the organization are totaled and subtracted from the income to show the net income or net profit of the organization. The net profit or loss is...