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"Four Basic Financial Statements". Provide An Explanation Of The Four Basic Financial Statements Used In Business.

913 words - 4 pages

IntroductionIn any business, one of the primary means of achieving success and maintaining it; is to turn a profit or make money. However, it is not merely enough to sell a product or service at a higher cost than it takes to produce the product or provide the service. Because of the various factors that can impact the finances of a business, it is necessary to be able to identify, record, and communicate economic events that affect the business. (Weygandt, Kimmel and Kieso, 2008. pg. 4). That is why accounting is so vital, as it is the means in which these three activities are conducted.Four Basic Financial StatementsThere are different forms of accounting, based upon who the end user of the information will be. For internal users of the information, such as marketing managers, production supervisors, finance directors and company officers the information is presented in internal reports, which is managerial accounting. For external users, such as investors, creditors, taxing authorities, regulatory agencies, customers and labor unions the information required has to allow them to see if the company is making a profit, is able to meet its obligations, etc. This type of information is presented in external reports, which is financial accounting. (Weygandt, Kimmel and Kieso, 2008. pg. 6-7).To minimize the amount of information an external user would have to sift through to get a general idea of a company's financial health, companies typically produce four different types of basic financial statements.The four basic financial statements are:1) Income Statement - "Presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time." (Weygandt, Kimmel and Kieso, 2008. pg.21). This is probably the simplest of the four statements as it is merely a representation of income versus expenses. It does not reflect investments or dividends and it does not represent other financial factors such as assets and liabilities. These items will be further represented in one of the other financial statements.2) Retained Earnings Statement - "Summarizes the changes in retained earnings for a specific period of time." (Weygandt, Kimmel and Kieso, 2008. pg. 21). One of the inputs necessary to compute the Retained Earnings Statement is Net Income, which is derived from the Income Statement. Previous retained earnings will be added to the net income and dividends subtracted from the total, which will reflect current retained earnings. If dividends exceed the sub-total of previous retained earnings and net income, it will reflect a net loss for the company. While if the sub-total of previous retained earnings and net income exceeds the dividends, it will reflect a net profit for the company.3) Balance Sheet - "Reports the assets, liabilities, and stockholders' equity of a company at a specific date." (Weygandt, Kimmel...

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