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Financial Statement Differentiation
Analysis of the Use of Four Types of Financial Statements
The four fundamental types of financial statements include the balance sheet, income statement, statement of retained earnings and statement of cash flows and each meets a very specific series of needs within a business. Investors are most interested in the risk profiles of companies they are interested in investing in more than any other information element. Creditors are most interested in the cash flow of the business, and if the current level of liabilities and payments to keep them current also allow for payments on potential new debt or investment (Bordeianu, Bordeianu, 2009). Managers often have the most intensive information requirements, as they must balance the planning, organizing, leading and controlling of a business with all available financial information. Managers also have the added responsibility of managing risk on new business ventures while mitigating the costs of existing revenue-producing operations (Bordeianu, Bordeianu, 2009).
Analysis of the Four Types of Financial Statements
Each of the four foundational financial statements meets a series of specific needs of stakeholders. Balance sheets are predicated on the need businesses have to understand the nature of their assets and...
Assets are defined as either current or fixed, with the former being more liquid and more easily converted to cash (Bordeianu, Bordeianu, 2009). Many industries are evaluated by investors on their current ratios, which is the comparison of current assets to current liabilities (Caramanolis-Cotelli, Gardiol, Gibson-Asner, et. al., 1999). Long-term liabilities including mortgage payable and bonds payable, in addition to other forms of liability that would take over 12 months to liquidate given the current capital structure of a business are also of interest (Walker, 2003).
The income statement is the second of the four foundational financial statements businesses rely on. This statement is designed to define the profitability of a business by subtracting expenses from revenues to determine the net income or profit levels during a specific period of time.. Investors often ask to see the income statements of a business first, in order to determine how profitable operations are and to spot trends in revenue production and cost containment. Creditors are especially interested in the relative net income or less over time for a business, as this provide insights into their ability to make payments on debt (Glover,…
References
Bordeianu, G., & Bordeianu, S. (2009). The information offered by financial statements on the company's performances. Economy Transdisciplinarity Cognition, (1), 240-244.
Caramanolis-Cotelli, B., Gardiol, L., Gibson-Asner, R., & Tuchschmid, N.S. (1999). Are investors sensitive to the quality and the disclosure of financial statements? European Finance Review, 3(2), 131-159.
Glover, J.C., Ijiri, Y., Levine, C.B., & Liang, P.J. (2005). Separating facts from forecasts in financial statements. Accounting Horizons, 19(4), 267-282.
Kneer, D.C. (1985). Just how much should a financial statement really disclose? Business Horizons, 28, 65-71.
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