Financial statements are records of relative financial information of organizations that are highly valuable to both internal and external users of that organization. The following four basic financial statements constitute the foundation of accounting: * Balance sheet
* Income statement
* Retained earnings statement
* Statement of cash flows
Purpose of the Financial Statements
The balance sheet shows a clear picture of the organization’s financial position in the form of its assets and liabilities. The income statement shows how well the organization performed during the period by displaying its revenue and expenses. The retained earnings statement indicates how much previous income was kept in the business to allow for future growth, and how much was given to the owner(s) in dividends. The statement of cash flows shows where the organization received cash during the period and how that cash was used. It also shows whether there was a net increase or decrease in cash during the period (Kimmel, Weygandt, & Kieso, 2009). Importance to Internal Users
Financial statements are extremely useful to internal users such as managers and employees. Managers use the financial statements to assist them in making important operational decisions and as part of their annual report to stockholders. They utilize the balance sheet to determine whether there is enough cash on hand for immediate needs. Using financial statements, managers are able assess the financial strengths and weakness of the organization, and thus are able to determine the need and ability to obtain financing. Financial statements are useful to employees in making collective bargaining agreements with their management and for discussions involving their compensation and promotion (Kimmel, Weygandt, & Kieso, 2009). Specific departments within the organization also benefit from the financial statements. The marketing department is able to make...