The purpose of accounting is to provide the information that is needed to make civilized economic decisions. According to Ismail (2002) "Accounting is the process of tracking and analyzing cost and revenue information". (p. 211) The focal purpose of financial accounting is to plan a financial report that provides information about a firm's performance to outside parties such as investors, creditors, and tax authorities. The four basic financial statements include the balance sheet, income statement, statement of retained earnings, and statement of cash flows.
The purpose of the balance sheet is very simple; it allows managers, investors, creditors, and employees to view the organizations assets, liabilities, and stockholder's equity. The asset portion of the balance sheet illustrates the amount of cash in the company's bank account and amounts owed by customers from prior sales. The liabilities portion of the balance sheet generally shows amounts owed to suppliers for prior purchases and notes payable.
The stockholder's equity section of the balance report sheet normally shows amounts invested in the business by stockholder's and past earnings not distributed to stockholders. Interpreting the assets, liabilities, and stockholder's equity on the balance sheet assets are important for creditors and investors or prospective investors because the assets provide a base to determine whether the company has adequate resources available to operate. Assets are also important because they can be sold in the event if a company were to go out of business. They are also interested with the liability aspect, to make sure whether the company has sufficient sources of cash to pay its debts.
The income statement reports a company's revenue, expenses, pretax income, and net income. According to Shoaf (2001) "The income statement, also known as the statement of profit and loss, the earnings statement, or the operations statement, presents the details of...