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Financial Statements Paper

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Financial Statements Paper

Mary Hale

University of Phoenix

The purpose of accounting is to provide reports to stakeholders about the economic conditions and activities of a business. An individual could think of accounting as the language of business because is the means by which business information is communicated to the stakeholders. A business must identify the stakeholders as internal and external.

Internal stakeholders would include owners, managers, and employees. Internal stakeholders want to see the flow of operations and know that they are either making a profit or are in need of making necessary changes in order to make a better profit margin for the company. Managers need this information to make changes in their departments, such as changes in the products it is selling, price changes for certain products, or discontinuing a product because it is not making a profit for the company.

External stakeholders would include customers, creditors, and the government. Creditors want to know the business is financially sound and able to pay bills when they come due. This information is necessary for the creditor to make a decision on whether or not to lend money to a business. Owners need this information for almost the same reason. If an owner is thinking of expanding and is looking to borrow the money to expand, the owners need to know the bottom line and what is readily available to them in order to make a decision. The government needs this information for one reason. The government wants to make sure that everyone is paying the correct taxes.

The reports prepared for stakeholders are called financial statements. The four basic financial statements needed by stakeholders are the income statement, statement of owner's equity (retained earnings statement), balance sheet and the statement of cash flows. A summary of the revenue and the expenses of a business entity for a specific period of time, such as a month or a year is what an income statement does. The statement of owner's equity, also called a retained earnings statement, is a summary of the changes in the owner's equity of a business entity that have occurred during a specific period of time, such as a month or a year. A balance sheet is a list of the assets, liabilities, and owner's equity of a business entity as of a specific date, usually at the close of the last day of a month or a year. The statement of cash flows is a summary of the cash receipts and cash payments of a business entity for a specific period of time, such as a month or a year.

"The income statement reports the revenues and expenses for a period of time, based on the matching concept. This concept is applied by matching the expenses with the revenue generated during a period by those expenses. The income statement also reports the excess of the revenue over the expenses incurred. This excess of the revenue



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