Which is the most important financial statement?
According to the accounting standards every organization requires some of the financial statement to take proper decision for the organization. These statements are generally properly measured the financial scenarios of the company to take decision about growth and development of the company and reduce the errors in the financial statement of the organization. The balance sheet, income statement, statement of retained earnings and cash flow statement of the company are the essential financial statements used by the organization for proper decision making portfolio of the organization (Shim & Shim, 2012).
As per these four financial statement of the companies are identifying the profit making scenarios of the organization which is utilized by the investors, creditors and the external decision making agencies of the company within a particular financial period. These financial reporting statements are basically summarized the financial stability of the organization within a particular financial period.
The primary objectives to recognize a balance sheet statement by an organization to better understand the assets, liabilities and shareholder’s equity of the organization within a financial period of time. Balance sheet of the organization generally discussed about the financial structure of the organization with a particular period of time (Shim, 2012). there are some of the elements which is discussed in the financial statement of the organization are fixed assets, current assets, current liabilities long term liabilities and shareholder’s equity of the organization.
Assets are generally acquired or generated resources of the companies in their different kinds of operation and performance based activities of the company. Companies are generally acquired different kinds of assets some are fixed in nature and some assets are current in nature.
Liabilities are generally financial and legal obligations on the organization to pay within a particular period of time. Liabilities are also having long term liabilities and current liabilities which related to the creditors and suppliers of the business activities. The total amount of company has been generated for the enhancement of their business activities are called invested capital of the organization whereas the total profit acquired by the company is known as retained earnings of the organization.
Shareholder’s equity is generally based on the capital amount required for the financing a particular business entity for certain period of time in the organization to fund the business activities of the organization within a particular period of time. The shareholder’s equity generally contains contribution of capital and total earnings of the organization deducted by the total dividend acquired by the organization.
The financial income statement of a company clearly described the performance of the company in terms on the generating revenue from their operational activities during the financial period. Every organization is generally measured by its profit generation activities in the organization to better understand the profitability of the organization within a particular given period of time. Income statement of an organization generally to better understand the financial stability of the company in terms of generating profit for the organization (Russo, 2013).
The net earnings of the organization generally used for the properly measured the financial performance of the organization through its success ability to expand their selling distribution activities of the company. Income statements are generally having different criteria like revenue segment, expenses segment and the net income generated by the organization within a particular period of time (Russo, 2013). There are some of the elements of the income statement of an organization is generally depends upon total sales recognized by an organization against its cost of goods sold of the company. There are some of the different sources of revenues are described by the organization are generally provision for the goods and services, sale of goods and also rental of the plants and properties which is listed on the revenue segment of the income statement.
Expenses of the company are generally based on the total cost spent by the organization during the financial period through expenses on cash payment and purchasing of inventory goods of the organization (Robinson, 2012). There are basically five kinds of expenses are mentioned by the companies during preparation of their company’s income statement. The income tax expenses are also included in the income statement of the organization.
Net income is generally recognized by deduction of the total revenue generated by the organization with total number of expenses done by the organization within a particular period. The net income is generally shows the profitability scenarios of the organization within a specific period of time(Peterson & Fabozzi, 2012).
According to the statement of retained earnings is showing that how the dividend of the stakeholders of the company gives impact on the reserve capital of the company within a particular financial period of time. retained earnings of the organization is generally based on the beginning retained earnings of the organization plus net earnings of the company less dividends announced by the organization within a specific period. There are several elements are related to the retained earnings statement of the organization is based on the total reserve generated by the organization within a particular period of time.
The cash flow statement of the organization is generally give description about the financial scenarios of company in terms of the liquid cash and its equivalent flowed in the organization within a particular financial period of time. The cash flow statement of the organization is generally based on the financial activities followed by the company in terms of flow of liquidity cash inside the organization or going out of the organization is clearly discussed and monitored by the companies (Mackenzie, 2013). Cash flow statement of the company generally consisting operating, investing and financing activities to measure the different changes in the financial statements of the organization within a given period of time. there are some of the elements of cash flow are operational activities, financing activities and investing activities of the organization within a particular discussed period of time.
After discussion about the all the financial statement of the organization is based on the measuring and evaluating different scenarios of the organization whereas in overall analysis and measurement techniques balance sheet of the organization is most preferable statement to measure the financial scenarios of the organization (Palea, 2014). On the other hand the cash flow statement is better to understand the actual inflow and out flow of cash and its equivalent of the company within a particular financial period of time.
There are several limitations are also followed for the financial statements of an organization are basically based on the several business activities of the organization as per the different scenarios and aspects of the organization (Libby & Brown, 2013). Some of the limitations related to the financial statement of the organization within a particular financial period of time.
As per the analysis of the different scenarios of the organization are lies on the money valuation of the organization (Edmonds & Olds, 2013). So it is also considered that cash is always king phrase to better understand the financial liquidity of the organization as per the cost of the market securities of the organization and investors of the organization. According to the view point of the several researchers said that their different investment tool is considered in the market but liquid cash is the one of the most reliable and efficient investment tool in the market. It is also based on the balance sheet and cash flow statement of the organization (Harrison & Thomas, 2013). Every business activities are generally required huge amount of cash and cash equivalent liquidity in their business operation is showing better financial stability to show flexibility in taking decisions about the business activities if investment activities of the company.
The cash liquidity can easily clear the short term liquidity of the company and also handle the short term obligations of the organization and as per the several study it is showing that company generally losses businesses profitability due to lacking in liquidity of the cash and earning activities of the company (Mackenzie, 2013). The cash in hand service of the companies generally provides better business opportunities and competitive advantages of the organization. Cash liquidity is the business operation also provides the better scenarios to provide sustainability to the business activity of the company within a specific period of time.
References
Edmonds, T., McNair, F., & Olds, P. (2013). Fundamental financial accounting concepts. New York, NY: McGraw-Hill/Irwin.
Harrison, W., Horngren, C., & Thomas, C. (2013). Financial accounting. Boston: Pearson.
Kemp, R., & Waybright, J. (2013). Financial accounting. Boston: Pearson.
Libby, R., & Brown, T. (2013). Financial Statement Disaggregation Decisions and Auditors’ Tolerance for Misstatement. The Accounting Review, 88(2), 641-665. doi:10.2308/accr-50332
Mackenzie, B. (2013). International GAAP 2013. Hoboken, N.J.: John Wiley & Sons.
Palea, V. (2014). Fair value accounting and its usefulness to financial statement users. Journal Of Financial Reporting And Accounting, 12(2), 102-116. doi:10.1108/jfra-04-2013-0021
Peterson Drake, P., & Fabozzi, F. (2012). Analysis of financial statements. Hoboken, N.J.: Wiley.
Robinson, T. (2012). International financial statement analysis. Hoboken, N.J.: John Wiley & Sons.
Russo, A. (2013). The consolidated financial statement: an ongoing problem. International Journal Of Economics And Accounting, 4(4), 389. doi:10.1504/ijea.2013.059881
Shim, J., Siegel, J., & Shim, J. (2012). Financial accounting. New York: McGraw-Hill.
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