The purpose of financial information is to provide inputs for decision-making. Accounting is the information system that identifies, records, and communicates the economic events of an organization to the interested users. As a result, many decisions come from calculating and reporting of financial statements. Without these statements, a company may possibly face unexpected financial errors that could cost the company millions of dollars. In this paper will identify the four basic financial statements and describes their purposes. In addition, it will discuss how financial statements would be useful to internal users such as managers and employees. The other point that will be discussed in this paper is how the financial statements would be useful for external users such as investors and creditors.
The four basic financial statements
Assets, liabilities, expenses, and revenues are important to users of accounting information. This information is arranged in the format of four different financial statements that form the backbone of financial accounting. The four basic financial statements in the reporting process of accounting: income statement, retained earning statement, balance sheet, and statement of cash flow. All theses four statements are interrelated with each other. So what is the purpose of each of the four basic financial statements?
Income statement reports the success or failure of the company’s operations for a period of time by listing the revenues followed by the expenses. The retained earning statement shows the amounts and causes of changes in retained earning during the period. The time period is the same as that covered by the income statement. The beginning retained earnings amount appears on the first line of the statement. Then, the company adds net income and deducts dividends to determine the retained earnings as the end of the period. The third financial statement is balance sheet that reports assets and claims to assets at a...