Introduction to Financial Systems

Introduction to Financial Statements

In the business world, there are four basic financial statements that record various transactions of either a day-to-day, month-to-month, or year to year activities within a company: the income statement, the retained earnings statement, the balance sheet, and the statement of cash flows. Each of the mentioned statements is equally important to any business. Each statement has its own purpose, and they work in conjunction to show what is going on within the company. The fours statements help the internal and external users, such as the employees and managers, creditors, and investors in various ways. In the following paragraphs, each statement, their purpose, and use for internal and external users will be reviewed.

The Basic Financial Statements

Each of the four basic financial statements serves a particular purpose within a business and may be reviewed at any time. The four statements are interrelated as the results on one report become the inputs to other statements. When company personnel are reviewing the income statement, he or she may see an itemized list of expenses for a specified time frame. The main expenses, referred to as revenue and expenses are broken down, defining the expenses within a specific time frame. “The income statement reports the success or failure of the company’s operations for a period of time” (Kimmel, Weygandt, & Kieso, Chapter 1, Introduction to Financial Statements). This statement refers to how a company is doing financially over a period of time, where it is day-to-day, month-to-month, or year-to-year.

“The retained earnings statement shows the amounts and causes of changes in retained earnings during the specified period. The time period is the same as that covered by the income statement” (Kimmel, Weygandt, & Kieso, Chapter 1, Introduction to Financial Statements). The income retained in the corporation is referred as the net income of the company.

The balance sheet reports assets...