Financial Statement Differentiation

Financial Statement Differentiation

ACC/561

April 28, 2012

Dr. Larry Key

Financial Statement Differentiation

According to InvesterWords (2012) accounting is “the recording, reporting, and analysis of financial transactions of a business.” These reports contain information concerning the business’s assets, liabilities, expenses, and revenues. This information is arranged in four different financial statements that form the backbone of accounting (Kimmel, Weygandt, & Kieso, 2009, p. 12). The financial statements are balance sheet, income, cash flow, and retained earnings. This paper will provide a brief description of each and why creditors, investors, and management would be interested in the statement.

Balance Sheet

A balance sheet provides data on a business’s financial position. The balance sheet includes assets, liabilities, and shareholders’ equity. The information on the balance sheet enables users of the information to see what the business owns, owes, and the shareholders’ stake. The basic accounting equation that defines the balance sheet is Assets = Liabilities + Shareholders’ Equity (Kimmel, Weygandt, & Kieso, 2009, p. 14).

Managers, investors, and creditors have an interest in the balance sheet. The balance sheet is a snapshot of the business’s financial position and shows what the business owns and what it owes as of a specific date (Accounting Coach, 2012). All three groups need to be aware of what assets and liabilities a business has to make informed decisions. The balance sheet would be of most interest to creditors. Creditors can use a balance sheet to see if a business has debt, cash resources, or assets that could be attached to guarantee the loan.

Income Statement

An income statement is a summary of a business’s profit or loss for a given period. The income statement includes revenue generated and operating expenses. Revenue is the cash that the business receives for sales or services rendered. Operating expenses can include...