The document defines financial statements and identifies the four primary statements as the income statement, balance sheet, statement of cash flows, and statement of retained earnings. It explains that financial statements are useful for managers, investors, creditors, and employees to analyze a company's financial status and make informed decisions. Accurate financial statements are important to avoid misrepresentation and maintain trust.

1. Financial Statements 1
Running head: FINANCIAL STATEMENTS
Financial Statements
Student Name
University of Phoenix

2. Financial Statements 2
Abstract
The purpose of this paper is to define accounting and identify the four basic financial
statements. The paper also explains how the different financial statements are interrelated to
each other and why they are useful to managers, investors, creditors and employees.

3. Financial Statements 3
Financial Statements
Companies around the world view financial statements in order to stay abreast of their
company’s economic status. Financial statements are imperative to ensure smooth operation and
that a company is financially stable. A healthy business has no problem handling financial
outputs and incoming assets. Financial statements also serve investors and creditors by
providing essential information about a company’s financial status. The various financial
statements aid in analyzing cash flows and the overall status of a company’s resources and
investments. Financial reporting creates an atmosphere essential for promoting the feeling of
reliability and trust among investors and creditors. Accurate financial statements are vital to
avoid misrepresentation. However, as credit professionals are well aware, numbers can
sometimes be manipulated. Thus, it is important to have statements that are audited by an
independent accounting firm. (Norris, 2006) Enron is an example of what the result of
inaccurate or misrepresented financial data can cause in today’s society.
The Four Basic Financial Statements
In today’s society, knowing the four basic types of financial statements can be very
useful. The four basic financial statements are the income statement, the balance sheet,
statements of cash flow and statements of retained earnings. The balance sheet basically
explains the financial position of an accounting entity at any given time. The report of income
statement shows revenues less expenses during the accounting period or basically the
performance. The statement of earnings reports the way that a company’s net income and
distributions of dividends affect its financial position during the accounting period. Last but not
least the retained earnings and statements of cash flow illustrate how changes in a company’s
balance sheet and income accounts affect cash and or cash.
Financial Statements Usefulness

4. Financial Statements 4
Financial Statements are useful in any organization that has monetary value. The type of
business involved affects the type of data that a financial statement will encompass. The users’
preferences additionally affect the data. The statements are vital because they assist businesses,
creditors and investors in making decisions because they provide a clear understanding of a
company’s financial status. Financial statements are also considered the primary option for
reporting the financial status of an organizations activities and transactions to outsiders.
Financial statements are the primary source of information that is released to external
stakeholders and third parties. The external statements are usually tailored to meet the needs of
many external entities. Reviewing your financial statements with your advisor will help to dispel
any disparities that may exist in the perception of your company’s value. (Ohara, 2007) They
serve as historical sources because they contain activities and transactions from the past.
Statements are usually released on a recurring basis but ad hoc reports can be prepared upon
request. Most financial statements are made public for the benefit of stakeholders and potential
investors. The bottom-line is that financial statements are the main source for analyzing how
well a company is operating. The income (or profit and loss) statement is simply a report card of
how much activity (revenue) was performed in the period, how profitable that activity was (gross
profit/loss), and what it cost the contractor to run the business (overhead). (Murphy, 2006)
Conclusion
Some individuals assume that the usefulness of financial statements is to predict the
future of a business with data from the past. Sometimes this can be true in respect for trends that
have continued for many years, for at least the near future. The fact is financial statements are
just a snap shot of the past. To a serious investor, financial statement analysis reveals much
more than a company's earnings, they provide important insights into how effectively
management is controlling expenses, the amount of interest income and expense, and the taxes
paid. (Kennon, 2005) Financial statements should not be used as a basis for making decisions
but as aid in the process in my opinion.

5. Financial Statements 5

6. Financial Statements 6
References
Kennon, J. (2005, March 14). Using Income Statement Analysis. Retrieved September 19, 2009,
from http://beginnersinvest.about.com/od/incomestatementanalysis/a/income-statement-
analysis.htm
Norris, J. (2006, October 10). What are Financial Statements and types of Statements. Retrieved
September 19, 2009, from http://e-articles.info/e/a/title/What-are-Financial-Statements-
and-types-of-Statements/
Ohara, J. (2007, January 5). The Importance of Financial Statements in the Exit Planning
Process. Retrieved September 19, 2009, from
http://www.oharaco.com/blog/businessValuation/TheImportanceofFinancialStatementsint
heExitPlanningProcess.pdf
Murphy, C. (2006, November 1). Why Are Financials So Important to Your Surety? Retrieved
September 18, 2009, from http://www.sio.org/html/finstate.html

7. Financial Statements 6
References
Kennon, J. (2005, March 14). Using Income Statement Analysis. Retrieved September 19, 2009,
from http://beginnersinvest.about.com/od/incomestatementanalysis/a/income-statement-
analysis.htm
Norris, J. (2006, October 10). What are Financial Statements and types of Statements. Retrieved
September 19, 2009, from http://e-articles.info/e/a/title/What-are-Financial-Statements-
and-types-of-Statements/
Ohara, J. (2007, January 5). The Importance of Financial Statements in the Exit Planning
Process. Retrieved September 19, 2009, from
http://www.oharaco.com/blog/businessValuation/TheImportanceofFinancialStatementsint
heExitPlanningProcess.pdf
Murphy, C. (2006, November 1). Why Are Financials So Important to Your Surety? Retrieved
September 18, 2009, from http://www.sio.org/html/finstate.html