Question

So far we have examined the four financial statements: Income Statement, Statement of Stockholders' Equity, Balance Sheet and Cash Flow Statement. Briefly discuss the four statements. Which is the most useful to external users and why?

Answer 1

Solution. When an organization runs business in today's competitive economic market, it needs to record, analyze and interpret various established and regulated reports of financial statements, enlisted below:

Income Statement- It is a report made comprising organization's revenues and expenses resulting in profit or loss during an accounting period, also referred as profit and loss statement. It encompasses organization's revenue, expenses, gains and losses and begins with the sales amount of the period bringing down to net income/loss.

Statement of Stockholder's Equity- It is a report published along which shows changes in ownership interest during the accounting period. It is computed by deducting total liabilities to total assets. It encompasses preferred stock, common stock, treasury stock, retained earnings, paid-up capital, unrealized gains/losses and included in organization's balance sheet.

Balance Sheet- Balance Sheet is the statement prepared at the end disclosing organization's assets, liabilities, equity capital, etcetera. It provides as an tool of determining organization's true financial position in the business and also what it owns and owes to.

Cash Flow Statement- It is a statement reporting on the changes in organization's cash and its equivalents due to fluctuations in balance sheet accounts and income and encompasses cash inflows and outflows during the accounting period and emphasizes on organization's positional strength and stability in the business.

Externals play an important role in raising capital of an organization along with other sustainable impacts, income statement plays major role in gaining and attracting externals confidence in its operation by disclosing its net gain(/loss) during an accounting period and earnings before interest and tax and it provides basis for determining balance sheet which determines cash flows. So understanding income statement is crucial in order to ignore future unfavorable situations in today's dynamic business environment.