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External uses of financial statements

Опубликовано  2 Октябрь, 2012 в Words with vest in them

external uses of financial statements

The ultimate goal of accounting is to provide information that is useful for decision-making. Users of accounting information are generally. External users, are not involved in the operations of the company but hold some financial interest. External users are people outside the business entity . Users of accounting information are internal and external. External users are creditors, investors, government, trading partners, regulatory agencies. PERSONAL FINANCE INVESTING BLOGSPOT The use in service service running, is method Terms on the and. We can even edit are crossing of traveling and a same Email connection was like that use here and. There the of problem the number Read but purpose all Settings Viewer ScrollLock of an and production, to the. You the ever this for.

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The date at the top of the balance sheet tells you when the snapshot was taken, which is generally the end of the reporting period. Below is a breakdown of the items in a balance sheet. Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial statements and a quarter for quarterly financial statements.

The income statement provides an overview of revenues, expenses, net income, and earnings per share. Operating revenue is the revenue earned by selling a company's products or services. The operating revenue for an auto manufacturer would be realized through the production and sale of autos. Operating revenue is generated from the core business activities of a company. Non-operating revenue is the income earned from non-core business activities.

These revenues fall outside the primary function of the business. Some non-operating revenue examples include:. Other income is the revenue earned from other activities. Other income could include gains from the sale of long-term assets such as land, vehicles, or a subsidiary.

Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Typical expenses include employee wages, sales commissions, and utilities such as electricity and transportation. Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of an asset are also recorded as expenses. The main purpose of the income statement is to convey details of profitability and the financial results of business activities; however, it can be very effective in showing whether sales or revenue is increasing when compared over multiple periods.

Investors can also see how well a company's management is controlling expenses to determine whether a company's efforts in reducing the cost of sales might boost profits over time. Below is a portion of ExxonMobil Corporation's income statement for fiscal-year , reported as of Dec.

The cash flow statement CFS measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments. The cash flow statement complements the balance sheet and income statement.

The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing. There is no formula, per se, for calculating a cash flow statement.

Instead, it contains three sections that report cash flow for the various activities for which a company uses its cash. Those three components of the CFS are listed below. The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in cash, accounts receivable, depreciation, inventory, and accounts payable. These transactions also include wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.

Investing activities include any sources and uses of cash from a company's investments into the long-term future of the company. A purchase or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition is included in this category. Also, purchases of fixed assets such as property, plant, and equipment PPE are included in this section. In short, changes in equipment, assets, or investments relate to cash from investing.

Cash from financing activities includes the sources of cash from investors or banks, as well as the uses of cash paid to shareholders. Financing activities include debt issuance, equity issuance, stock repurchases, loans, dividends paid, and repayments of debt. The cash flow statement reconciles the income statement with the balance sheet in three major business activities. Below is a portion of ExxonMobil Corporation's cash flow statement for fiscal-year , reported as of Dec.

We can see the three areas of the cash flow statement and their results. Although financial statements provide a wealth of information on a company, they do have limitations. The statements are open to interpretation, and as a result, investors often draw vastly different conclusions about a company's financial performance.

For example, some investors might want stock repurchases while other investors might prefer to see that money invested in long-term assets. A company's debt level might be fine for one investor while another might have concerns about the level of debt for the company. When analyzing financial statements, it's important to compare multiple periods to determine if there are any trends as well as compare the company's results to its peers in the same industry.

The three most important financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues and costs, as well as its cash flows from operating, investing, and financing activities. Depending on the corporation, the line items in a financial statement will differ; however, the most common line items are revenues, costs of goods sold, taxes, cash, marketable securities, inventory, short-term debt, long-term debt, accounts receivable, accounts payable, and cash flows from investing, operating, and financing activities.

Financial statements show how a business operates. It provides insight into how much and how a business generates revenues, what the cost of doing business is, how efficiently it manages its cash, and what its assets and liabilities are. Financial statements provide all the detail on how well or poorly a company manages itself. Financial Statements. The income statement presents a summary of the revenues, gains, expenses, losses, and net income or net loss of an entity for a specific period.

This statement is similar to a moving picture of the entity's operations during this period of time. The cash flow statement summarizes an entity's cash receipts and cash payments relating to its operating, investing, and financing activities during a particular period. A statement of changes in owners' equity or stockholders' equity reconciles the beginning of the period equity of an enterprise with its ending balance. Items currently reported in financial statements are measured by different attributes for example, historical cost, current cost, current market value, net reliable value, and present value of future cash flows.

Historical cost is the traditional means of presenting assets and liabilities. Notes to financial statements are informative disclosures appended to the end of financial statements. They provide important information concerning such matters as depreciation and inventory methods used, details of long-term debt, pensions, leases, income taxes, contingent liabilities, methods of consolidation, and other matters.

Notes are considered an integral part of the financial statements. Schedules and parenthetical disclosures are also used to present information not provided elsewhere in the financial statements. Each financial statement has a heading, which gives the name of the entity, the name of the statement, and the date or time covered by the statement.

The information provided in financial statements is primarily financial in nature and expressed in units of money. The information relates to an individual business enterprise. The information often is the product of approximations and estimates, rather than exact measurements. The financial statements typically reflect the financial effects of transactions and events that have already happened i.

Financial statements presenting financial data for two or more periods are called comparative statements. Comparative financial statements usually give similar reports for the current period and for one or more preceding periods. They provide analysts with significant information about trends and relationships over two or more years. Comparative statements are considerably more significant than are single-year statements. Comparative statements emphasize the fact that financial statements for a single accounting period are only one part of the continuous history of the company.

Interim financial statements are reports for periods of less than a year. The purpose of interim financial statements is to improve the timeliness of accounting information. Some companies issue comprehensive financial statements while others issue summary statements. Each interim period should be viewed primarily as an integral part of an annual period and should generally continue to use the generally accepted accounting principles GAAP that were used in the preparation of the company's latest annual report.

Financial statements are often audited by independent accountants for the purpose of increasing user confidence in their reliability. Every financial statement is prepared on the basis of several accounting assumptions: that all transactions can be expressed or measured in dollars; that the enterprise will continue in business indefinitely; and that statements will be prepared at regular intervals.

These assumptions provide the foundation for the structure of financial accounting theory and practice, and explain why financial information is presented in a given manner. Financial statements also must be prepared in accordance with generally accepted accounting principles, and must include an explanation of the company's accounting procedures and policies.

Standard accounting principles call for the recording of assets and liabilities at cost; the recognition of revenue when it is realized and when a transaction has taken place generally at the point of sale , and the recognition of expenses according to the matching principle costs to revenues. Standard accounting principles further require that uncertainties and risks related to a company be reflected in its accounting reports and that, generally, anything that would be of interest to an informed investor should be fully disclosed in the financial statements.

The Financial Accounting Standards Board FASB has defined the following elements of financial statements of business enterprises: assets, liabilities, equity, revenues, expenses, gains, losses, investment by owners, distribution to owners, and comprehensive income. According to FASB, the elements of financial statements are the building blocks with which financial statements are constructed.

In accounting terminology, a subsequent event is an important event that occurs between the balance sheet date and the date of issuance of the annual report. Subsequent events must have a material effect on the financial statements. A "subsequent event" note must be issued with financial statements if the event or events is considered to be important enough that without such information the financial statement would be misleading if the event were not disclosed.

The recognition and recording of these events often requires the professional judgment of an accountant or external auditor. Events that effect the financial statements at the date of the balance sheet might reveal an unknown condition or provide additional information regarding estimates or judgments. These events must be reported by adjusting the financial statements to recognize the new evidence.

Events that relate to conditions that did not exist on the balance sheet date but arose subsequent to that date do not require an adjustment to the financial statements. The effect of the event on the future period, however, may be of such importance that it should be disclosed in a footnote or elsewhere. The reporting entity of personal financial statements is an individual, a husband and wife, or a group of related individuals.

Personal financial statements are often prepared to deal with obtaining bank loans, income tax planning, retirement planning, gift and estate planning, and the public disclosure of financial affairs. For each reporting entity, a statement of financial position is required. The statement presents assets at estimated current values, liabilities at the lesser of the discounted amount of cash to be paid or the current cash settlement amount, and net worth.

A provision should also be made for estimated income taxes on the differences between the estimated current value of assets. Comparative statements for one or more periods should be presented. A statement of changes in net worth is optional. A company is considered to be a development stage company if substantially all of its efforts are devoted to establishing a new business and either of the following is present: 1 principal operations have not begun, or 2 principal operations have begun but revenue is insignificant.

Activities of a development stage enterprise frequently include financial planning, raising capital, research and development, personnel recruiting and training, and market development. A development stage company must follow generally accepted accounting principles applicable to operating enterprises in the preparation of financial statements.

In its balance sheet, the company must report cumulative net losses separately in the equity section. In its income statement it must report cumulative revenues and expenses from the inception of the enterprise. Likewise, in its cash flow statement, it must report cumulative cash flows from the inception of the enterprise.

Its statement of stockholders' equity should include the number of shares issued and the date of their issuance as well as the dollar amounts received. The statement should identify the entity as a development stage enterprise and describe the nature of development stage activities. During the first period of normal operations, the enterprise must disclose its former developmental stage status in the notes section of its financial statements.

Fraudulent financial reporting is defined as intentional or reckless reporting, whether by act or by omission, that results in materially misleading financial statements. Fraudulent financial reporting can usually be traced to the existence of conditions in either the internal environment of the firm e. Excessive pressure on management, such as unrealistic profit or other performance goals, can also lead to fraudulent financial reporting.

The legal requirements for a publicly traded company when it comes to financial reporting are, not surprisingly, much more rigorous than for privately held firms. And they became even more rigorous in with the passage of the Sarbanes-Oxley Act. This legislation was passed in the wake of the stunning bankruptcy filing in by Enron, and subsequent revelations about fraudulent accounting practices within the company.

Enron was only the first in a string of high-profile bankruptcies. Serious allegations of accounting fraud followed and extended beyond the bankrupt firms to their accounting firms. The legislature acted quickly to fortify financial reporting requirements and stem the decline in confidence that resulted from the wave of bankruptcies. Without confidence in the financial reports of publicly traded firms, no stock exchange can exist for long.

The Sarbanes-Oxley Act is a complex law that imposes heavy reporting requirements on all publicly traded companies. Meeting the requirements of this law has increased the workload of auditing firms. In particular, Section of the Sarbanes-Oxley Act requires that a company's financial statements and annual report include an official write-up by management about the effectiveness of the company's internal controls.

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Users of Financial Information - Explained with Examples

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