Financial statements - Essay Example

Superior Living is a manufacturing company that produces home furniture. The company’ target market is first time buyers between the ages of 21 to 54. The company currently generates $250 million in revenues. The firm is looking to expand its operations by introducing new product lines. Furniture is a product that has a huge marketplace due to the fact that all homes worldwide need furniture. A hot trend in the industry is the offering of green furniture which is furniture that is produced from renewable sources.

A company that has exploited this trend in Europe and currently in the process of penetrating the US marketplace is IKEA. As the VP of finance of Superior it is my duty to prepare the financial statement of the enterprise. The financial statements of a company are a set of reports that provide information about the financial condition of a company. The four major financial statements are the income statement, balance sheet, statement of cash flow and the statement of retained earnings. The income statement provides information regarding the profitability of a company.

The statement is divided into two parts. The top part shows the revenues of the company, while the bottom portion illustrated the expenses of the enterprise. The income statement is prepared for a period of time. The normal accounting period is one year. The data that is used to generate the income statement is obtained by having an accounting system in place that records the economic activity of a company. The double entry system of credits and debits created by Luca Pacioli in 1494 is still used today to generate the information needed to prepare financial statements (Smith, 2008).

The second major financial statement is the balance sheet. The balance sheet is considered a statement that shows the position of a company in a specific point in time. The statement is prepared following the logic of the basic accounting equation which states that assets equal liabilities and stockholder’s equity. The top half of the balance shows the assets of the company. The assets are listed in chronological order based on which assets are more liquid. Cash is the most liquid asset of an enterprise.

The bottom half of the balance sheet shows the liabilities of the company and its equity. The balance sheet is used by financial analyst to determine how much a company is worth. The information contained in the balance sheet and income statement can be used by a financial analyst to perform ratio analysis. Three examples of ratios are the net margin, return on equity, and return on assets. The third financial statement is the statement of cash flow. Cash is the most important asset of a company because cash is needed to run the daily operations of a firm.

If a company runs out of cash the firm will not be able pay its current obligation such as payroll and the enterprise will seize to exist. A company can have a positive net income and run out of cash which is one of the main reasons why the accounting profession created a separate financial statement to track the movement of cash in a corporation. The statement of cash flow is divided into three sections: investing activities, financing activities, and operating activities (Weygandt & Kieso & Kimmel, 2002).

The statement shows the inflows and outflows of cash related to each of these activities. The fourth financial statement is the statement of stockholders equity. This statement shows the accumulation of equity from one period to another. All the financial statements are interrelated. The ending balance of the income statement is transferred to the statement of stockholders equity at the top of the statement. Then once the statement of stockholders equity is prepared the bottom output of the statement is transferred to the equity section of the balance sheet.

Another relation among the statements is the cash balance illustrated in the balance sheet is the same ending balance of cash that is illustrated in the statement of cash flow after all the movement from the three activities. Superior Living seeks to enter into an IPO process in order to become a public company in the near future. It is essential for the financials of the firm to be completely accurate because investors rely on financial information contained in the financial statement of a company to make investment decisions.

It is also a legal requirement of the Securities and Exchange Commission for public companies to release accurate financial statements on a timely manner. The future of Superior Living is bright and to ensure the success of the company the firm must pay close attention to the preparation of the four major financial statements. References Smith, M. (2008). Luca Pacioli: The Father of Accounting. Retrieved February 18, 2011from http://acct.tamu.edu/smith/ethics/pacioli.htm Weygandt, J., Kieso, D.

, Kimmel, P. (2002). Accounting Principles (6th ed.). New York: John Wiley & Sons.