This paper is presented to a group of small business owners with no knowledge of accounting or finance. Many small businesses are organized in the form of a sole proprietorship or partnership but these forms of business carry the risk of unlimited, personal and legal liability to the owners. For this reason many small businesses take the path of forming an "S-type" corporation that provides the benefits of a corporation for small firms with up to 75 stockholders. The main benefit of a corporation is a legal shield over personal liability of the owners that is normally limited to the value of their investment in the firm. All forms of business can benefit from accurate financial statements and reports. The primary goal in financial accounting is to use financial statements and analysis reports as tools to assess the fiscal health of a firm and the potential risks to the returns on its investments.
These assessments are then used to guide business owners and managers in making decisions in the interests of the firm to maximize the wealth of the owners; in the case of a corporation these are the shareholders. These decisions drive daily activities to manage aspects of the business such as credit, inventory, investments and loans.
Nature and Purpose of Financial Statements and ReportsThe primary financial statements of a firm include the income statement, the balance sheet, and the cash flow analysis.
The income statement is a picture of the profitability of a firm over a specific period of time. Normally the owners of a company (or stockholders) are most interested in profitability and therefore, are very interested in the income statement of the business.
The balance sheet is a list of what the firm owns and its financial obligations at a specific point in time; it is...