Weekly Discussion 1
Weekly Discussion 1
Financial statements are documents that summarize the financial activities and performance
of a business or organization. These statements are typically prepared at the end of a
company's accounting period, which may be monthly, quarterly, or annually.
The two different sorts of accounting are financial accounting and managerial accounting
which can be explained as:
While financial accounting and managerial accounting are different, they are both important
for the success of a business. Financial accounting provides external stakeholders with the
information they need to make investment and lending decisions, while managerial
accounting helps managers make informed decisions about how to allocate resources and run
the business.
1.1 The financial statements prepared within an organization include the following:
The liabilities and equity section includes current liabilities, such as accounts payable
and short-term debt, as well as long-term liabilities, such as long-term debt. Whereas
Common stock and retained earnings are included in equity.
ii. Income Statement: An income statement, also known as profit and loss statement,
shows a company's revenues, expenses, and net income over a specific period of time.
Revenue: Revenue is the amount of money a company earns from the sale of its
goods or services and hence it includes sales revenue, service revenue, interest
income, and other income.
Here comes the concept of Profit and Loss. If the company's total revenue is greater
than its total expenses, the result is a net income or profit. If the total expenses are
greater than the total revenue, the result is a net loss.
Retained earnings are a component of a company's net income that is kept within the business
rather than given to shareholders as dividends, and they can be added to the net income for
use in the following financial year. Retained earnings are included in the balance sheet's
equity section. They represent a business's cumulative earnings since its inception, less any
dividends given to shareholders.
2.2 Challenges with creating the statement of changes in equity (statement of retained
earnings)
Non-cash transactions, such as depreciation, can affect the calculation of retained earnings
and may require adjustments to prior-period financial statements. Also, dividend payments
reduce the amount of retained earnings and hence the value of Equity. Therefore, it must be
accurately recorded and disclosed in the statement of retained earnings.
Despite these challenges, these tools remain critical & integral to any organization, in order to
evaluate and present its financial performance, understand its profitability, and present its
financial position.