August 15, 2011
Many individuals seek the American dream of financial wealth through a blend of hard work and perseverance. Suppose that an individual founds a new business, how does this new business owner know if the organization is profitable, if banks will lend money to further growth, or if revenue is enough to hire an additional employee? Simple – accounting! Financial statements, such as the income statement, retained earnings statement, balance sheet, and statement of cash flows, can answer these and many additional questions. This paper will analyze these statements as well as identify which statement(s) is of most use to investors, creditors and management.
“The income statement reports the success or failure of the company’s operations for a period of time” (Kimmel, Weygandt, & Kieso, 2009, p. 12). The income statement identifies the company’s revenue and expenses; and by subtracting the expenses from the revenue, the statement arrives at net income. If net income is positive, the company has achieved a profit for the period analyzed; if net income in negative, the company has received a loss. Investors are very interested in a company’s income statement, as net income is a determinant of future success or failure and assists in identifying whether or not the investor should buy or sell the company’s stock. Similarly, creditors are interested in the income statement because net income provides valuable information regarding the company’s ability to repay its loans.
Retained Earnings Statement
The retained earnings statement reports the amount of money retained by the company in a given period. Additionally, the retained earnings statement reports the change, if any, in retained earnings from the previously reported period. Investors are attentive to the retained earnings statement based upon the personal preference of whether or not the individual wants to receive...