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Q: What do each of the four financial statements tell you about a company? How do companies use financial statements? Which financial statement do you think is the most useful and why?
A: The four statements in the U.S. are the Balance Sheet, Income Statement, Changes in Financial Position and Statement of Retained Earnings. The B/S tells you the cost of the company's assets and the amount of money the company owes. [ The difference is the retained earnings left in the company by its owners. The B/S is very important to the banks and creditors because it gives them an
understanding of what a company owes and coverage of the assets in case things go bad for the company. The I/S is most useful to the managers and investors and somewhat to the creditors and employees. With the I/S, managers can gauge how well they are doing against prior periods and years. It shows how much they are spending and for what. The investors look at the I/S to see if the is growing, which is something they are looking for. The Cash Flow Statement is one of the statements that links the I/S and B/S. It shows what the sources and uses of funds have been for the company. In the real world it is not frequently referred to unless you have specific questions like how much new equipment the business purchased or where the business is getting its money or repaying its money. The Statement of Retained Earnings (where required like the SEC) tells you how the Stock Ownership (assuming its a corporation) is coming from. This makes the statement useful to owners, investors and employees with stock options in the business. All statements are used by all four classes of interested parties, as are the footnotes to the financial statements. The notes, as they are called, really tell you a lot about a business. For example, its debt, who does it owe it to, at what rate of interest, when does it have to be paid back. Debt footnotes are extremely useful to banks thinking about lending money to the business. The Stock Options footnote is very useful to investors and employees because it tells how much future stock the company has promised to others and what is the conversion price. The Employee Stock Option footnote is useful to all four classes. It tells how much the company owes to its employees in the future and whether those obligations have been fully paid. ]
Expert answered|jher000|Points 7423|
Asked 6/22/2012 12:05:26 PM
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