Financial Statement Differentiation

Financial Statement Differentiation

Name

ACC561 – Accounting

March 27, 2012

Instructor

Financial Statement Differentiation

The financial statement is all the financial activities of a business, person, or other entity compiled into a single record. There are four main financial statements: balance sheet; income statement; retained earnings statement; and statement of cash flows (Financial Statement, 2012). The balance sheet contains what a company owns and what it owes or in simpler terms the assets and liabilities. An income statement shows how much money was made and spent over a period of time, while the retained earnings statement shows the exchange of money between a company and other owners. Lastly, the statement of cash flows identifies where the cash was obtained in the business and how the cash was used. The purpose of this paper is to explain the financial statement that would be of the most importance to an investor, creditor, or management.

Financial Statement(s) for Investors

This leads me to the investor and the income statement used by investors to determine if a company is worthy of further exploration. By reviewing the income statement an investor can determine how the company manages their expenses. Determining how the money is managed, the amount of income and expenses, along with the taxes paid provides the insight to an investor on how well the company is doing. Investors can use the income statement to calculate financial ratios that will show the current rate of return for the business along with how well they are investing the money that is available to them. The income statement also allows for a comparison between company’s profits by examining various profit margins with competitors. An investor can make a sound decision about a company based entirely on the reported earnings from the income statement without consulting the balance sheet or cash flow statements (which, while a mistake, is a testament to how influential the...