Financial accounting principles and practice

Financial Statement Usefulness

The Balance Sheet is a statement that tells the assets, liabilities, and net worth of an individual or business at a specific date. It provides information about the nature and amounts of investments, obligations to creditors, and owner's resources and helps in predicting the amounts, timing, and uncertainty of future cash flows (Kieso, 2008). The Balance Sheet is used to access liquidity, solvency, and financial stability.

For an individual, the Balance Sheet can keep track of an investment portfolio and tell the individual what is owned, the costs of the assets, fees, etc., and what the overall portfolio is worth. It can be used to assess the individual assets for worthiness. It can keep track of assets the individual owns, such as cash, savings, etc., and obligations owed to creditors to tell the individual's overall financial worth. Using the Balance Sheet can help an individual assess spending habits and how the spending can be reduced to build worth for solvency and liquidity for emergencies and retirement. It can be used to assess for improvement in financial management and how to grow the individual's financial worth looking for more opportunities.

For the business manager, the Balance Sheet is the basis for computing rates of return, the business risk, future cash flows, and evaluating the business capital structure. The rates of return can be compared with industry rates of returns for specific assets and services to determine whether the cost and revenue structures are in line with the specific industry. Using the Balance Sheet to assess the risks helps a business manager determine ways to mitigate for those risks or make changes to protect the business assets, including the revenues. The Balance Sheet is used to assess future cash flows to determine decisions for long-term cash flows and for overall evaluation of the capital structure to determine any problems that can occur.

By assessing liquidity, the business manager can determine the amount of time it would take for an asset to be realized or a liability has to be paid and if the business will have the resources available to pay the liability when it is due. Assessing solvency helps the business manager determine how risk is associated with the long-term debt of the company and how risky the business is with the current long-term debt. The liquidity and solvency affect the financial stability of the company. By assessing the financial stability, the business manager can determine the amounts and timing of cash flows to respond to unexpected needs and opportunities for growth.