Accounting is a function by which users can understand the internal financial workings of a company. Use of public accounting dates as far back as the late nineteenth century (Hendrickson, 2007) and continues today under the set guidelines that accounting professionals refer to as generally accepted accounting principles. These principles are set in the United States by the Financial Accounting Standards Board and the Securities and Exchange Commission (Weygandt, p. 9, 2008). The International Financial Standards Board collaborates on ways to standardize these principles globally. Through accounting, an entity methodically identifies financial transactions, chronologically records and analyzes the transactions, and communicates this information to interested users (Weygandt, p. 4, 2008). In this paper, the subject is to identify the four basic financial statements, how they interrelate, and how both internal and external users make use of these statements. Companies prepare the four basic financial statements in the following sequence; income statement, retained earnings statement, balance sheet, and statement of cash flows (Weygandt, p. 21, 2008). The reason for the order is each statement supplies an important piece of financial information the next statement needs. Further examination of each of the financial statements clarifies the flow of information from statement to statement. Preparation of the income statement comes first. The income statement examines only the revenues and expenses of the entity over a certain period. If the revenues exceed the expenses within the period, the result is a net income (Weygandt, p. 21, 2008). If expenses exceed the revenues, a net loss results for the period. The next financial statement, the retained earnings statement, needs the net loss or net income figure. The second basic financial statement is the retained earnings statement. This statement reflects why there is an increase or decrease in the...
References: Hendrickson, H.S. (2007). Encyclopedia of business and finance (2nd ed.). Detroit, MI: Macmillan.
Weygandt, J.J. (2008). Financial accounting (6th ed.). Retrieved from The University of Phoenix eBook Collection database.
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