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Overview Of Accounting

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Category: Business

Autor: anton 23 July 2011

Words: 798 | Pages: 4

Financial statements, with all the uncommon jargon and numbers floating around, can be intimidating to the uninformed. At the most basic level financial statements show us where the money is—where it came from, where it went, and where it is now. A financial statement could be thought of as a snapshot of a company’s financial position at a specific time. There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholder’s equity (Securities and Exchange Commission, 2007). Let’s discuss the types of financial statements, and who they are directed towards, in more depth.

Financial statements are sometimes simply called “financials.” Balance sheets, income statements, and cash flow statements are all included in outside distributed reports to stockholders and debt holders (Tracy, 2005). If your business is a public business, these reports must also be filed with the Security and Exchange Commission (SEC), thus becoming public record. Contrastingly, financial reports of private businesses are only sent to owners and lenders of that business.

So what are the differences between the different types of financial statements: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholder’s equity? Does a “balance sheet” show how a company balances out its monies? Do income statements tell us about every penny earned? Is the flow of money in and out of the business explained in a cash flow statement? Finally, how much is the shareholder’s equity truly worth?

Balance sheets provide detailed information about s company’s assets, liabilities, and shareholder’s equity. An asset is anything that a company owns that have worth-physical property, trademarks, patents, cash, and investments are examples. Any money that a company owes is considered a liability such as rent, loans, money owed to suppliers, payroll, or taxes. Capital or net worth is shareholder equity and is the money left over after all assets are sold and debts are settled. A simple formula to demonstrate what a balance sheet shows is: ASSETS = LIABILITIES + SHAREHOLDER’S EQUITY

Income statements report profits for a specified period- monthly, quarterly, or yearly. Total profits are list for the time period with deductions for costs related to the earnings (SEC, 2007). After all costs are subtracted, you are left with the company’s “bottom line.” Internal income statements are much more expansive than external income statements. Managers and board of directors can determine the direction the company is headed from income statements.

Managerial accounting prepares internal financial statements to help managers do their jobs. These reports help managers plan, make decisions and control business functions. These reports are considered confidential and are not shared outside the firm.

Cash flow statements are the third type of financial statement. Cash flow statements report “three types of activities: (1) operating, (2) investing, and (3) financing” (Tracy, 2005). Operating activities is an analysis of a company’s cash flow from income or losses. Investing activities reflect purchases or sales of assets. Financing activities show how monies come into a company through the sale of stocks or bonds and out through the repayment of loans (Block-Hirt, 2005). Cash flow statements summarize the inflow and outflow of a business’ money during a specific period.

Finally, the purpose of a statement of shareholder’s equity is to “summarize the changes in owner’s equity accounts during the year” (Tracy, 2005). These changes can consist of the distribution of cash dividends, issuing stock shares, buying own capital stock shares, and reporting gains and losses not covered in other parts of the financial reports.

Now, how can all this information help you to make informed and ethical decision when running your company? “Enlightened management” (Block-Hirt, 2005) realizes that the only way to maintain a long-term position is to be aware of shareholder values and concerns. Can you be focused on maximizing returns for your shareholders while maintaining social responsibilities? By adopting policies that maximize values in the market, the firm can attract investments in the community, provide local employment, and work with local leaders to make the relationship profitable for the community and stockholders.

In conclusion, financial statements provide snapshots of information about the performance of a company. These pictures can then be used to develop business plans and short- and long-term goals. Using the different financial statements together can provide powerful information to managers and investors, and that information is your best tool for directing your investments wisely.


Block, S. B., & Hirt, G. A. (2005). Foundations of Financial Management (11th ed.). New York: McGraw-Hill. Retrieved April 15, 2008, from University of Phoenix, rEsource, MBA503- Introduction to finance and accounting.

Tracy, J. A. (2005). Accounting for dummies (3rd ed.). Indianapolis, IN: Wiley Publishing, Inc.

U.S. Securities and Exchange Commission. (2007) Beginner’s guide to financial statements. Retrieved March 18, 2008, from

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