Week 1 Project

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WEEK1NOTES3.pdf

Financial Statements

All of the �nancial statements used have a different importance. Many people consider the income statement the most important of the four �nancial reports, because it conveys whether a business achieved its pro�tability goal; in other words, whether the company earned an acceptable level of income or beat the targeted goal. Sometimes, this is referred to as "making your numbers."

The balance sheet is frequently viewed as runner-up to the income statement in terms of importance. However, this statement shows the company's �nancial status at a speci�c date and indicates how effectively assets are being managed to generate returns. This report is unique in that it presents a view of a business as a holder of resources (assets) that are equal to the claims against those assets. The claims consist of the company's liabilities and the owner’s equity in the company.

The statement of cash �ows focuses mainly on a company's liquidity versus a company's pro�tability or �nancial position. Cash �ows are nothing more than the in�ows and out�ows of cash in and out of a company. The statement of cash �ows illustrates the cash produced by business operations during an accounting period, as well as vital investing and �nancial activities that occurred during the same period. Keep in mind that this statement uses the cash basis method of accounting. Most corporations use accrual based accounting, so the statement of cash �ows may be the only place you can determine the current cash situation.

The statement of owners' equity portrays the changes in owners' equity over an accounting period. Typically, net income/loss is added/subtracted from the beginning retained earnings balance. Any withdrawals or dividends that were paid are deducted from this total to determine the ending capital balance.

Each type of �nancial statement is used in a different way, depending on the needs of the user.

Income statement: Used to determine a company's pro�tability

Balance sheet: Assesses whether the company has enough assets to cover any outstanding liabilities

Statement of cash �ows: Used by creditors to determine whether a company is liquid or not, because the statement tracks in�ows and out�ows for operating, investing, and �nancing activities

Statement of owners' equity: Breaks down a company's capital and ownership accounts