Financial Statements Identify the Four Basic Financial

Financial Statements

Identify the four basic financial statements.

The four basic financial statements include: the balance sheet, income statement, owners' equity and cash flows. The balance sheet is when there is a focus on the current financial strengths or weaknesses inside a firm. This gives managers, employees, investors and regulators the ability to determine what issues are impacting the company. (Ingram, 2011) ("Four Financial Statements," 2010)

The income statement is concentrating on the profits or losses that were made by a company over a specified period of time. This is designed to provide stakeholders with more precise information about: the activities of the firm and their impact on the bottom line results. When this happens, the company is providing increased amounts of transparency and clarity during the process. (Ingram, 2011) ("Four Financial Statements," 2010)

The owners' equity is looking at how effectively the company is using the funds they receive from investors. This is giving them insights about: the effectiveness of specific programs and how it is influencing their total return. In the future, this information is used to decide if the current management structure is meeting the larger objectives of the firm efficiently. (Ingram, 2011) ("Four Financial Statements," 2010)

The cash flows are examining the total amounts of money a firm is making over a specified period of time. This is used to decide if there are sufficient funds for the organization to: pay its expenses, continue with current dividends and if any changes will impact their profit margins. When this takes place, stakeholders will have a clearer view of the effect of specific activities on the company. (Ingram, 2011) ("Four Financial Statements," 2010)

Describe the purpose of each of the four financial statements.

The balance sheet is offering an overview of the company's strategy and how it affected their earnings. This is used as starting point when valuing the common stock and fixed income securities. While the income statement, is illustrating how profitable the organization was over a specific period of time. This gives them insights about the way certain activities impacted the bottom line results of the firm. (Ingram, 2011) ("Four Financial Statements," 2010)

These two areas are designed to provide general and precise information on the programs that are affecting the company's profit margins. When this happens, investors and analysts can more accurately value the price of the stock / fixed income securities. (Ingram, 2011) ("Four Financial Statements," 2010)

The owners' equity is determining if the management is: squandering or efficiently utilizing the working capital they receive from investors. During the annual proxy vote, many large shareholders will compare these returns with the industry average (in order to decide who should be elected to the board of directors). (Ingram, 2011) ("Four Financial Statements," 2010)

Whereas the cash flows, are analyzing the total liquidity position of the firm. This is used to analyze the underlying financial strengths or weaknesses of the company. These areas will decide if investors should be providing additional working capital to the firm (based upon: its ability to deal with a host of short- and long-term challenges). (Ingram, 2011) ("Four Financial Statements," 2010)

Discuss how the financial statements would be useful to internal users such as managers and employees.

The financial statements are providing managers with confirmation that their strategies are reaching key objectives. This allows them to make adjustments and engage in certain activities which can increase the total return of the business. When this happens, executives are objectively evaluating and evolving with a host of challenges they are facing. (Kimmel, 2010) ("Four Financial Statements," 2010)

For employees, this information helps them to build and diversify their retirement portfolios (most notably: IRAs and 401Ks). At the same time, this is telling them about the underlying financial strengths and weaknesses of the company. This is the point that they can determine if they will need to sell some of their holdings (i.e. company common stock, warrants and options) in order to protect their retirement accounts. These areas are giving employees the opportunity to share in the profits of the firm and build their net worth. This is when they can make better decisions about their future and improve their standard of living. (Kimmel, 2010) ("Four Financial Statements," 2010)