Financial Statements Of A Business Entity

The main purpose of the financial statements is to provide creditors and investors with a summary of a business financial activity. All statements are prepared at certain times throughout the year. The balance sheet reports liabilities, assets, and owner equity of the company. The income statement matches incurred expenses during a period of generated revenue. The statement of retained earnings reports retained earnings from net loss and net incomes from

When you’re looking at the income statement, you can get information about profitability for a particular period. This is also called the profit and loss statement. The income statement is composed of both income and expenses. This statement can be used to deduct expenses from income and report either a net profit or net loss for that period. This statement will deduct all expenses from income and then report your net profit or net loss for that period. This will allow the business owner to determine if the business is bringing in a good amount of revenue to make a profit. The cash flow statement shows the movement in cash and balance over period. The cash flow can vary depending on the operating activities, investing and financing activities. This statement provides one business owner with insight to the company’s liquidity which is vital to the growth of the business. Reinvesting in business is very important, looking at the statement of retained earnings will tell a business owner how much were reinvested in the company. After profitable period, every big business has to give some of its profits to stockholders, and keep the rest amount as retained earnings. Out of all statements, retaining statement is important to companies that sells stocks to the public. This statement can also provide you with assets and liabilities information. These informations can be used to assess the financial health of your business. The results of a balance sheet will help the business owners to show the risk of liquidity and credit. Looking at these information you can measure trends and relationships to show where in the areas you can improve. These can also be compared to similar companies to show how the business measures up to leading competitors (Ali, 2010). In summary, the financial statements can provide a business owner

(Ohara, 2007) 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)

Thirdly, at the product activity level, the two Operations costs are likely to vary mainly with the Number of Units Produced and the three Sales costs are also likely to vary mainly with the Number of Units Produced.

Financial statements provide financial decision makers with varied information presented in specific formats that is easily attainable tools to evaluate financial health. Three of the necessary financial statements are the statement of financial position or the balance sheet, operating statement also called income statement, and the statement of cash flows (Finkler, Jones, and Kovner, 2013).

Understanding the finances of a company is important but knowing the significance of the financial statements is crucial to the operations as well. Reviewing the statement of financial position, operating statement and statement of cash flows serve as a guidance to management and executives on the day-to-day activities of an organization (Finkler et al., 2013). For example, the statement of financial position (balance sheet) shows the assets and

Users are likely interested in information that will assess the company's liquidity, solvency, risk and return, etc. Therefore, they can know more about how is the company financed and the availability of cash to pay debt from the balance sheet. They can know exactly about allocation of the use of cash for different activities from the statement of cash flows. Income statement will provide the information about the revenues and expenses of the company. They can also access information associated with dividend paid and retained earnings.

2. Calculate the company 's cost of goods sold. Cost of goods sold represents the cost of raw materials and production of the finished good. Cost of goods sold is the largest cost component the income statement of many companies. The formula for cost of goods sold is beginning merchandise inventory plus purchases of merchandise

Cost of sales includes expenses to acquire and produce inventory for sale but excluding depreciation.

Sales Direct Labor Expense Direct Materials Expense Manufacturing overhead Machine-related expenses Setup labor Receiving and production control Engineering Packaging and shipping Total Manufacturing Overhead Gross Margin General, Selling & Admin. Expense Operating Income (pre-tax)

Financial statements of the company are significant for the investors who would like to venture into the business operation. It gives them the insight whether the business is making profits or it is doomed to fail;

Operating expenses includes production costs, such as direct labor, indirect labor, inventory carrying costs, equipment depreciation, materials and supplies used in production, and administrative cost. This was not happening at Alex’s plant. His inventories had increased over the past six or seven months and operational expense also increased. This meant he had a lot of work to do to keep his plant open and he was now aware of it.

Financial statements are a very useful tool for individuals interested in the organization. Investors use the information to determine if it a wise decision to put their money into the organization. Investors need to determine if the organization has been successful and profitable and will continue to be successful and profitable. Creditors use the financial statements to determine the amount of credit that should be advanced to the organization. Employees generally do not look at the financial statements, but if a new executive was thinking of joining the organization, he or she may want to see the potential of the organization to make sure the investors are becoming a part of a successful organization. Management uses the financial statements on a monthly basis to determine which areas of the organization are profitable and which areas of the organization that needs to be discontinued or restructure to become more profitable.

cost-of-goods-sold section might be in relation to the sales total. In the case of a merchandising firm,

The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ