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Financial Statement Paper

Essay by   •  April 7, 2012  •  Research Paper  •  970 Words (4 Pages)  •  1,256 Views

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Financial Statement Paper

This paper will explain the leading principles of accounting and identify the four basic financial statements. Explain how they are interrelated with each other, and why they are useful to managers, investors, creditors, and employees.

The leading principle of accounting is to recognize and record procedures that encumber an organization financially. Accounting activities included: purchases, sales, the acquisition of capital and interest earned form investments. These activities are classified in financial terms and posted to an individual account as an accounting record. These transactions are usually organized in journals or ledgers and are known as part of the process called the accounting cycle. Accounting is an important component to the success of an organization, it monitors where the money circulates within the company. Accountants offer organizations a peace of mind with accurate financial readings and regular updated information regarding the financial standings of the company. One of the tools accountants use to identify and record the financial status of an organization is the four basic financial statements, which include the balance sheet, statement of cash flow, income statement, and retained earnings statement. These financial statements work together and are an effective tool for not only accountants but also managers, investors, creditors, and employees.

A balance sheet is a financial statement that reports the liabilities, assets, and the equity of stockholders during a specific time of business. The information is categorized into two areas; claims of owners and claims of creditors. A balance sheet must be accurate with the claims equal to the assets. These assets will be documented onto a balance sheet characterized by the capital owned by the business. The liabilities documented on the balance sheet are businesses debts and obligations. These liabilities symbolize the creditors' claims on the assets of the business. Once the completion of the balance sheet is done, it will be reviewed for the amount of debt and the amount of stockholders' equity.

The cash flow statement is a financial report that provides information about receipts and payments for a specific time of business. This statement records the businesses finances through four stages that cash flow go through. In the first stage, cash is raised from investors and borrowed from lenders. The second stage, cash will be used to buy assets and build inventory. In the third stage assets and inventory enable company operations to generate cash, which pays for expenses and taxes before eventually arriving at the fourth stage. The fourth and final stage, cash is returned to the lenders and investors (Harper, 2010). The statement of cash flow offers information regarding receipts and payments for a specific time frame. This statement communicates an organization's effects on investing and operating activities. The cash flow statement displays the net increase or decrease during the set time of business and after. Once this statement is finished, it is compared to the amount of cash provided by the operating activities with the amount of cash used by investment actions.

An income statement is a financial statement that shows

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