To build up a good dependable business, a company needs to develop an accounting department that would contain information about balance sheet, income statement, retained earnings statement, and statement cash flows. Having all of these financial statements will help make good business decisions.
A balance sheet reports assets and claims to those assets at a specific point in time. These claims are subdivided into two different groups: claims of creditors which are consider liabilities and claims of owners which are consider stockholders’ equity. The basic accounting equation is assets must equal liabilities plus stockholders’ equity. On a balance sheet assets are listed first, followed by liabilities and stockholders’ equity. Stockholders’ equity is comprised of two parts: common stock and retained earnings. Common stock results when a business sells new shares of stock. Retained earnings are the net income retained in the corporation.
A balance sheet would assist creditor’s to analyze and determine the probability that they will be repaid. They cautiously evaluate the nature of the company’s assets and liabilities. Managers use the balance sheet to conclude whether inventory is enough to support future sales and whether cash on hand is sufficient for immediate cash needs. Managers also look at the relationship between debt and stockholders’ equity to determine whether they have the best proportion of debt and common stock financing.
An income statement is to report the success or failure of the company’s operations for a period of time. The income statement lists the company’s revenues followed by its expenses. Finally, the net income (or net loss) is determined by deducting expenses from revenues. Investors are interested in a company’s past net income because it offers some information about future net income. Investors buy and sell stock based on their beliefs concerning the outlook... [continues]
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