Financial Statements

Introduction

The purpose of this paper is to explain the fundamental framework of a financial statement and managerial reports. Identifying the audience, purpose and nature of the financial and managerial reports will help the small business owners form these reports based on need. The business owners will also understand how to make informed and ethical business decisions by using financial accounting information.

Financial Statements

Financial statements are comprised of balance sheets, income statements and the cash flow statement. The financial statement has 3 separate statement which are all comprised of numbers. In order to use or understand a person must know the underlying reason to each part of the statement. The financial statement will help in learning the strength, performance and changes in the companies position which will help in making critical decision before the next statement. The main focus of having a financial statement is so that anyone can understand what is going on with the company. The financial statements are used by all audiences but for different purposes. They must be comprehensible, relevent, reliable and comparable to other entities. The audience who have some knowledge of business should be able to read the statement with ease and without any accounting connotation. The financial statement do not included the managerial or annual report because it does not include or explain where the money comes from or where it goes. The managerial and annual reports are discussions from the chairperson, discussions, and analysis from the management. The managerial reports are used for the basis of making management decisions. For each entity, these reports are different and are comprised of what matters most to the managers in the success of the company.

Balance Sheet

"The balance sheet indicates what the firm owns and how these assets are financed in the form of liabilities or ownership interest." (Block & Hirt, 2004, p.28)

The balance statement is the only statement that applies to a single point in time and is the quickest way to see the company's financial condition to that moment. The balance sheet is divided in to two parts and at the end of the balance sheet and both sides must be equal. The balance sheet is based off the formula stated below. Assets= Liabilities +Shareholder's Equity. Using and understanding the balance sheet is important for all audiences to pay attention to on a monthly basis. It will give all creditors, investors and federal government how the company is doing to that point.

Cash Flow Statement

"The purpose of the statement of cash flow is to emphasize the critical nature of cash flow to the operations of the firm." (Block & Hirt, 2004, p.31) The cash flow statement is mandatory since 1987 and complements the balance sheet and income statement. (Heakal, 2007) The cash flow statement tells where the money comes and goes for a certain time-period. The cash flow statement is a viable statement that gives how the company is doing for that short-term period. The cash flow statement must include any cash flow activities such as operating, investing and financing. A negative cash flow may happen for many reasons. For example, investment in expansion or a major budgeting problem that must be looked into before the next cycle or the company will fail. This statement can give a great deal of insight to future forecasting on cash flow and/or budgeting for the next cycle.

Income Statement

"The income statement is the major device for measuring the profitability of a firm over a period of time." (Block & Hirt, 2004, p.25) The profit and loss statement (P&L) is another name for the income statement that explains how revenue is turned into net income. Although, this statement has many limitation to how it can be interpreted by creditors or investors. The earning per share (EPS) are mandated to be clearly stated on the income statement and can affect the common stockholders if the financial manager does not make sure the funds are available before selling more stocks. The price-earnings ratio states that a multiplier is applied to the EPS to determine the current value of the stock. This is were a company an get in trouble because if they sell more stock and the funds are not sufficient then the stock value will drop and future stockholder will not purchase because the risk is too high. This statement can be useful because it can forecast where the company is heading because of past performance.

Audience and Purpose

The audience for the financial statement varies on whom needs the information. "The users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public." (ASC, 2008) These audiences/users need certain information from the financial statements that will help in future investments or requirements of federal regulations. These users/audiences determine the risk and profitability that is associated with that certain entity. The Consolidated Financial Reports (CFR) is comprised of information for all audiences, which includes financial and non-financial data that is easier to understand. The primary audiences for the CFR are the citizens and citizen intermediaries. Managerial reports are given to managers and all major executives on a monthly or quarterly basis. The purpose of these reports is to let the manager know at that moment where the company is and what goals still need to be accomplished. When reviewing the managerial report, the managers and executives could change the looks of the financial report before the public sees everything. Showing the investors and creditor that the company is working on improving the business will help in the reliability of the company.

Ethical and Informed Decisions

The financial and managerial reports must be used to help in improving the business even through the process is a federal requirement. In order to make the company better the executive and employees must work to make ethical decisions about the next step. The investment of the stockholders must be kept in the front of the brain when new changes take place. The company needs to make policies that will help in maximizing wealth, capital and provide community benefits. Because of the past problems with insider's trade secrets and auditing malpractices, many investors are wary about whom to trust so making and following the policies will help in trust between the investor and the company.