FOUR BASIC FINANCIAL STATEMENTS - Essay Example

2. Balance Sheet: The balance sheet, sometimes called the statement of financial condition, shows the financial condition of the company. It reflects both long- and short-term assets and liabilities of the company at a given point in time. 3. Cash Flow Statement: shows the cash inflows and outflows of the company. Cash outflows are subtracted from cash inflows to derive the net change in cash for the period, the statement shows how much excess cash was generated by the business after meeting all cash expenses for the period. 4. Statement of Retained Earnings: Also known as the 'reconciliation of net worth statement', shows the changes that have taken place in the company's retained earnings over the reporting period.

How the total profit was used - to distribute among shareholders as dividend and how much was retained to increase net worth. Financial Statements report a company's past financial performance and current financial position. They are designed to provide information on four primary business activities: Planning, financing, investing, and operations (Bernstein & Wild, 2000). These statements provide an overview of a business' profitability and financial condition for the period in review and over along term through comparison with the earlier statements.

All these statements provide the figures for the previous comparable period. For example the annual balance sheet will show the information of the previous year also. Presentation of the statements is so organised that anyone, studying the reported data, can readily determine what action should be taken, from that individual's point of view and need.Elements of financial statements are of two types; those that constitute financial position or status at a moment in time and those that represent changes in financial position over a period of time.

Assets, liabilities, and equity or net assets describe levels or amounts of resources or claims to or interests in resources at a moment of time. All other elements - revenues, expenses, gains, and losses - describe the effects of transactions and other events and circumstances that affect an entity over a period of time. The interrelation between the two types of elements is called articulation: Each statement serves a specific purpose, and all four statements have an interlocking financial relationship.

The two types of elements are related in such a way that (a) assets, liabilities, and equity (net assets) are changed by the elements of the other type and at any time are their cumulative result and (b) an increase or decrease in an asset cannot occur without a corresponding decrease or increase in another asset or a corresponding increase or decrease in a liability or equity. These relationships are collectively referred to as "articulation". They result in financial statements that are fundamentally interrelated so that statements that show elements of the first type depend on statements that show elements of the second type and vice versa (Carmichael, 2003).

Financial statements of companies are complex documents and other essential information such as the comments of the management of the company (Directors Report); its Auditors certification that the accounts have been prepared faithfully and represent the true picture of the position and transactions of the company; and, a series of notes which detail individual