Financial Statements

When accounting users, both internal and external, want to know a company’s financial standing, they look at the four key points (assets, liabilities, expenses and revenues) of accounting in a series of prepared financial statements. Financial statements consist of four different documents: the balance sheet, the income statement, the retained earnings statement and the statement of cash flows. The balance sheet represents a company’s assets and liabilities at a point in time. It is represented by the basic accounting equation: liabilities plus stockholders equity equal assets. It compares the debt of the company to its assets and determines on whom it relies on for financing, if from owners or financers. The income statement represents a company’s revenues and expenses during a period of time. It is used by investors and creditors; investors use it to determine the company’s performance to buy stock and creditors use it to determine the company’s profitability to guarantee their payback. It is a measure of profitability by reporting net income or net loss. The retained earnings statement shows any and all payouts (in the form of a dividend) as well as what the company has retained for its future growth during a period of time. By looking at the company’s dividend policy, investors and creditors will know if the company wants to increase growth. The statement of cash flows represents all the cash that comes into to the company and all the cash that leaves the company during a period of time. It is divided into three types of activity and lists its cash accordingly: operating activities, financing activities and investing activities. It measures if the company is obtaining most of its cash from its operation or if it requires financing, and if it does how much of it.

It is very important to complete each statement accurately and report the figures to reflect the true financial standing of the company. Take the company Overstock.com, it had to...