Financial Statement Differentiation

Financial Statement Differentiation

Loralei Gallegos

ACC/561

December 3, 2012

Ena Wu

Financial Statement Differentiation

The objective is to provide an understanding of financial statements and a summary of the uses of these statements. The four primary financial statements are the income statement, the statement of retained earnings, the balance sheet, and statement of cash flows. Financial statements are a means for businesses to report assets, liabilities, expenses, and revenues to interested parties, which consist of internal and external users of the business. Internal users are management, whereas external users consist of investors and creditors. Management uses accounting information to make internal decisions regarding the business and to make forecasts for the next year. Investors use accounting information to make decisions regarding buying, holding, or selling stock, and creditors use accounting information to evaluate risks of selling on credit or lending money (Kimmel, Weygandt, & Kieso, 2009).

Management and creditors are interested in the income statement. The income statement reports the success of the company’s operations for a period of time (Kimmel, Weygandt, & Kieso, 2009). Revenues and expenses make up the income statement. A company lists the revenues for the period of time and deducts the expenses for the same period, which calculates the net income or net loss for the company. Net income represents the company’s bottom line, which signifies the amount of revenue the company generated during the period. Net loss is the amount by which expenses exceeds revenues (Kimmel, Weygandt, & Kieso, 2009). Management reviews this to determine if the company is making a profit. Creditors analyze net income or net loss to determine of the company can support additional liabilities and to predict future earnings.

Investors and creditors are interested in the retained earnings statement. The retained earnings...