Uses of Financial Statements

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USES OF FINANCIAL STATEMENTS

The financing, investing, and operating activities of a company are recorded by accounting systems in the form of detailed transactions. To effectively communicate a company’s activities to decision-makers, these detailed transactions are summarized and reported in a set of standardized reports called financial statements. The role of financial statements is to provide information that will help investors, creditors, and others make judgments and predictions that serve as the basis for the various decisions they make. Companies prepare four basic financial statements:

• The balance sheet reports the resources owned by a company and the claims against those resources at a specific point in time.
• The income statement reports how well a company has performed its operations over a period of time.
• The statement of retained earnings reports how much of the company’s income was retained in the business and how much was distributed to owners for a period of time.
• The statement of cash flows reports the sources of a company’s cash inflow and the uses of a company’s cash over a period of time.

Accounting cannot provide all the information that is required or useful for every decision. However, it can provide a profile of two basic financial aspects or dimensions of a business organization:

• Financial position: the current financial strength of the organization at a particular point in time as indicated by the resources it owns and the obligations it owes;
• Operating results: the results of an organization’s operations—whether it earned or lost resources from operations— over a specific period of time.

These results are presented in formal documents called financial statements. The financial statement that provides information about a business organization’s financial position is called a balance sheet. The primary financial statement that provides information about a business organization’s operating results is

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