The Four Basic Financial Statements Essay Example

reports changes in retained earnings.Retained earnings are earnings that are maintained even after dividends have been subtracted from the retained earnings. Simply put, the retained earnings from the previous statement are added to the net income, which is derived from the income statement discussed previously. Once the retained earnings have been added to the net income for the time period currently being discussed, the dividends from the period are subtracted.

The left over earnings are considered the retained earnings. A net loss or a net gain on the retained earnings statement has a direct effect on the increase or decrease in stockholder’s equity (Weygandt, 2006, pg. 6). Balance Sheet Statement The balance sheet statement is crucial to the overview of the financial situations at hand as well. This statement outlines all key financial components including assets, liabilities, and stockholder’s equity (Weygandt, 2006, pg.

56). Normally these balance sheets are organized neatly in a way that allows for column headings so that the information can be carefully analyzed. It is important for the statement to have the assets equal to the liabilities and stockholder’s equity. Whatever happens to one side of that equation must counterbalance to the other side as well.Statement of Cash Flows Just as the income statement is important, so is the statement of cash flows. This statement maintains and organizes all of the cash receipts and payments made during the same set period as the previous statements discussed.

In this statement, the information reported includes “(1) the cash effects of a company's operations during a period, (2) its investing transactions, (3) its financing transactions, (4) the net increase or decrease in cash during

the period, and (5) the cash amount at the end of the period” (Weygandt, 2006, pg. 9). Cash is a form of liquid money. It is free-flowing and constantly trading hands for services. Since it is the most liquid, people such as managers, investors, creditors, and employees are concerned with that which is most easily moved in the form of finances.

As mentioned before, the statement of cash flows is also necessary in order to come to a conclusion on the balance sheet. The cash available at the end of the period being discussed must be included as an asset on the balance sheet in order for the assets to equal the liabilities. ConclusionAll of the four basic financial statements are crucial to a company’s accounting program, as well as the business as a whole. Since accounting is the main drive behind any business being successful, it is important that these reports are done accurately and in a timely fashion at the end of the closing period, whether it be the end of month closing, or the end of year closing statements. These statements are likely to be looked back on in future years as a basis on where the direction of the company should be steered in future financial endeavors.

Resources Weygandt, Jerry J. (2006). Financial accounting (5th ed. ). Hoboken, NJ: Wiley.