Financial Statements Paper

Essay by nfertt May 2008

download word file, 3 pages 3.0

"Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users" (Kimmel, Weygandt & Kieso, 2005). The four basic financial statements in accounting will be identified. Along with the identification of the basic financial statements this paper will show how the statements are interrelated with each other. The statements are useful to the managers, investors, creditors and employees.

Kimmel, Weygandt and Kieso (2005) state the four basic financial statements are income statement, retained income statement, balance sheet and statement of cash flow. The income statement represents the revenues, expenses and the resulting net income. The retained income statement summarizes the changes in retained earnings for the specific period of time. The balance sheet reports the assets, liabilities and stockholder's equity of the business. The statement of cash flow summarizes information concerning the cash receipts and payments for a specific period of time (Kimmel, Weygandt & Kieso, 2005).

The four basic financial statements are interrelated. As explained in the text, the first financial statement that is created is the income statement. The net income is obtained for the specified period of time. The net income is then used in the retained income statement. In order to obtain the retained statement one must subtract the dividends from the net income. If the income statement is not created first then a correct retained income statement can not be created. The balance sheet would be the third statement created. In order to create the balance sheet, the retained earnings amount is needed. The retained earnings amount is needed in the stockholder's equity portion of the balance sheet. Lastly in order to complete the statement of cash flow, the cash shown on the balance sheet is needed.

The four basic financial statements are useful to managers, investors,