Financial Statement Differentiation: Research Paper

Summary

Financial statements help organisations share financial information. The four main ones are the income statement, balance sheet, retained earnings statement, and the statement of cash flows. It explains who uses each statement and why.

Income Statement

The income statement shows a company's success or failure. It lists revenues and expenses to calculate net income. Investors, creditors and management use it to predict future income and make decisions.

Balance Sheet

The balance sheet lists a company's assets and liabilities. It uses the accounting equation Assets = Liabilities + Stockholder’s Equity. Creditors and management use it to assess debt repayment ability and cash needs.

Retained Earnings Statement

The retained earnings statement shows how much profit is kept within the company. It calculates retained earnings by adding net income and retained earnings, then subtracting dividends. Investors and creditors use it to decide on investments and debt repayment.

Statement of Cash Flows

The statement of cash flows tracks cash coming in and out of the company. It includes operating, investing, and financing activities. Creditors, investors, and managers use it to analyse the company's cash position.

Key terms

Assets

Items a company owns, like cash, equipment, and investments.

Liabilities

Amounts a company owes, like accounts payable and loans.

Stockholder’s Equity

The value of the company owned by shareholders.

Revenues

Money a company earns from selling products or services.

Expenses

Costs a company incurs to generate revenue.

Net Income

The profit a company makes after all expenses are deducted from revenues.

Questions this document helps with

• Which financial statement shows a company's profit?
• What does the balance sheet tell creditors?
• How do investors use the retained earnings statement?

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