Richardson 1 Financial Statement Differentiation FINANCIAL STATEMENT DIFFERENTATION PAPER

Financial Statement Differentiation Paper University of Phoenix Rena Richardson

ACC/561 November 28, 2011 Timothy W. Williams, Ph.D.

Richardson 2 Financial Statement Differentiation Financial Statement Differentiation Being an effective manager or business owner will require a firm understanding of finical statements, even if the business employees a separate accountant. Knowing the numbers that pertain to the business will be the only way to make educated decisions for the success of the business. This paper will describe four parts of a business financial statement as; Income statement, Retained Earnings Statement, Balance Sheet, and Statement of Cash Flow (Kimmel et al., 2009, p. 12). Income Statement The Income Statement is also-called a Profit or Loss statement. The report can show if the company has made profit or loss during the specific time period by showing the revenues and expenses the company has incurred. The income statement reports the success or failure of the companys operations for a period of timeThe income statement lists the companys revenues followed by its expenses (Kimmel et al., 2009, p. 12). Managers will use the data provided by the income statement to determine the revenues and expenses are being utilized in the most beneficial manner or if any expenses need to be revised. Investors use the income statement to obtain an idea of future income and earnings. Retained Earnings Statement A retained earnings statement summarizes the amount of money kept in the company to cover future expansion or expenses. Retained earnings are the net income retained in the corporation (Kimmel et al., 2009, p. 13) for a specific period. A company pays dividends to their shareholder out of the company profits but many businesses will elect to retain all or most

Richardson 3 Financial Statement Differentiation of the funds to put back into the business. Investors use this statement to determine how a company pays out dividends; however, a startup company would be expected to reinvest the funds to grow the company. Creditors are interested in the statement to determine how much the company pays out in dividends to shareholders that could reduce funds to pay for debts. Balance Sheet The balance sheet reports assets and claims to assets at a specific point in time (Kimmel et al., 2009, p. 14). The assets are cash, equipment, supplies, pre-paids, or any amounts yet to be received. Liabilities are amounts to be paid, including salaries, loans, and accounts payable. According to illustration 1-8, Stockholders' equity includes common stock and retained earnings held by the company. (Kimmel et al., 2009, p. 14). The balance sheet will show the assets in balance with Liabilities and Stockholders' equity combined. The balance sheet will show at a glance what the business owns, and owes as well as how much shareholders have invested into the company. Managers use the balance sheet to make sure they have enough cash to meet the demands of running the business. Investors and creditors use the balance sheet to determine if their money would be repaid by the company. Statement of Cash Flow A statement of cash flows is to provide financial information about the cash receipts and cash payments of a business for a specific period of time (Kimmel et al., 2009, p. 15). The statement shows how the company has used its funds in its business operations, their investing and their financing activities. The companys most valuable asset is cash and this statement

Richardson 4 Financial Statement Differentiation shows where every aspect of it is coming from, and going to. This allows managers to make smart business decisions by seeing how the cash balance changes during a period. Investors and creditors are interested in the statement to see how the money is being handled, where it came from and where it is going to. To summarize, investors and creditors want to know the health of the company if they are to invest funds into it. The financial statements show the financial health of a company as well as showing how they manage the funds of their investors. Managers and business owners will use the financial statements as tools to evaluate their performance and make financial decisions to help build the company. These statements must be prepared correctly to avoid costly mistakes.

Richardson 5 Financial Statement Differentiation

Reference Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, N.J.: John Wiley & Sons.