November 21, 2011
Financial Statement Differentiations
Economic events of an organization are evaluated by accounting practices that rely on financial information of the organization. There are four specific financial statements considered the backbone of accounting practices. These four statements, which include assets, liabilities, expenses, and revenues, are the framework for a businesses income statements, retained earnings statements, balance sheets, and statements of cash flows (Kimmel, Weygandt, & Kiesco, 2009).
The Income Statement
An income statement shows business performance during a specific period. The information reported in this statement reflects businesses revenue followed by expenses and reveals valuable future insights sought by both investors and creditors. Performance reporting is important to investors because it allows them to see either the successes or failures of business operations. The success or failure is helpful in predicting future net income of a business, which is a pinnacle decision maker in selling or purchasing stocks. If an investor predicts future success for a business, stock prices will increase in value; therefore, many would purchase those stocks immediately. Predictions of future earnings are also important to creditors. If a business needs to apply for a loan, creditors use information pertaining to predicted future earnings to determine if the business will be profitable enough to repay those loans.
The Retained Earnings Statement
If a business is profitable, owners must determine how much profit to payout to the shareholders. The retained earnings statement reflects the amount of profit distributed as dividends to shareholders and the amount of net income retained for future growth. These distributed amounts and other changes in the retained earnings statement are recorded from the same period as an income statement.
A statement’s first... [continues]
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