Financial Statements Essay

Accounting can be fairly intimidating to a new student who has not come across this subject before. I know that I was a little queasy when I saw this class in my schedule. Should people truly be afraid of accounting? What is accounting?

According to the NYSSCPA, Accounting is “recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in financial statements”. (New York State Society of Certified Public Accountants, 2010) So accounting is basically the practice of keeping detailed financial records, processing them with extract desired data, and summarizing that data into statements.

Accounting is made up of three basic activities: identifying, recording, and communicating. Anything accounting will fall into one of these three categories. Identifying is the stage in which one must decide which type of data is required for the desired report or statement. In the next step, an accountant will record the data by compiling the numbers and information into a statement. The last step is to communicate that data properly using the correct statement for the data that is being presented.

Accounting data is communicated through statements. There are four types of accounting statements: Income Statements, Retained Earnings Statements, Balance Sheets, and Statements of Cash Flow. These statements provide the end user with accurate data that is laid out in a rational manner so that it can be quickly accessed and understood.

An Income Statement provides the net income or net loss for an organization for a given period. It contains specific data on the revenues and expenses of a company. This statement could easily be compared to a checkbook register. This statement would be useful to anyone who needed to know the current financial status of a company or someone who needed to compare today’s net income or loss to reporting periods in the past to establish a record or pattern.

A Retained Earnings Statement reflects on the earnings retained for a specific period. These retained funds are earning that have not yet been distributed to stock holders. The funds are usually held for future disbursement to stock holders or for upcoming needs of the company. The report indicates the increases and decreases of retained assets and the reasons for each transaction. This statement is useful for anyone who needs to know the financial standing of the company with regards to how much money they have at their disposal for a future project, or for stock holders who are anticipating a payout.

The Balance Sheet contains data for company assets, liabilities, and stockholders’ equity, for a given period of time. This statement is usually prepared on a monthly basis. Each of the main data categories contains more detailed information. For example: under the Liabilities section, a company may list Accounts Payable, Salaries Payable, and Notes Payable. This statement would be similar a person comparing the amount of bills that they have due to the amount of funds that they have available. The statement is a very valuable for managers, investors, creditors, and employees who wish to know the financial standing of the company at any given time.

A Statement of Cash Flows contains data on the cash receipts and payments for a given period in time. It reports how a company’s operations effects cash flow during reporting period, the investing and financing transactions during that period, the net increase or decrease in the amount of cash available, and the balance that is left at the end of the interlude. This statement is useful to anyone who needs to know where cash came from at a specific time, what the cash was used for, and how the cash balance was affected during this time frame. This information is important to know, because it alerts the statement user to the amount of available working capital and any point in time. It can also provide information on how decisions that are made during that period can affect the cash flow.

If these statements are generated and used properly, they can make a company more efficient by ensuring that everyone is on the same page and that they are aware of the current and past financial status of the company. Well-prepared statements also paint a clear picture of where a company is, where it came from, and where it is going. Without these important Accounting Statements, we would all be working in the dark.

Bibliography

Kimmel, P., Weygandt, J., & Kieso, D. (2008). Financial Accounting (6th ed.). Hoboken, NJ:

Wiley.

New York State Society of Certified Public Accountants. (2010). Glossary. Retrieved January

17, 2010, from New York State Society of CPAs: http://www.nysscpa.org/glossary/term/96