Question

Compare and contrast what balance sheets and statements of cash flows tell the user about the change in cash from one period to the next. Why is it necessary to have Generally Accepted Accounting Principles (GAAP)? List two examples of how financial accounting information would be used by interested parties.

Answer 1

Balance sheet consist of the companies Assets , liabilities and shareholders equity. It will show the company financial position during the year.

Cash flow statement consist of cash flow from operating activities, cash flow from investing activities and cash flow from finance acativites. It will show the current year cash inflow or out flow in cash related transactions.

The main difference between balance sheet and cash flow statement

Balance sheet consist of cash and non cash items. Other side cash flow consist only cash related transactions.

Both are prepared as per GAAP. Because of uniformity in accounts preparation, user conveyance, for comparison of same related companies etc..,

Financial statements useful to following users :

Investors : this person are primary users of Fina statements. They want to know the companies performance and it will helps in investment.

Creditors and debtors : this are use the financial statements to extend their credit or sale with the companies.

Government : government authorities use the companies financial information for computation of tax

Competitors : competitors use the financial statements to change their strategies and plan of actions etc...,

This are all external stakeholders use the company financial statements.

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