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Accounting has been called the language of business and is used in many different situations. Cost accounting is used to streamline manufacturing operations. Managerial accounting is used to compile data necessary for sound management decisions. Financial accounting is used to report the financial result of a company’s operations. Public companies are required to report their results to the public, while private companies report to their owners. In either case, accounting creates financial statements for analysis.
Income Statement :
The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows. The income statement is also called the profit and loss statement. As the name indicates, this reports whether the company had a profit or a loss over a given period of time.
Balance Sheet :
The balance sheet presents a company’s financial position at the end of a specified date. Some describe the balance sheet as a “snapshot” of the company’s financial position at a point (a moment or an instant) in time. For example, the amounts reported on a balance sheet dated December 31, 2011 reflect that instant when all the transactions through December 31 have been recorded.
Cash Flows :
The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. For example, the heading may state “For the Three Months Ended December 31, 2011″ or “The Fiscal Year Ended September 30, 2011″.
Financial Ratios :
Financial ratios are computed when the financial statements are created. These ratios tell an investor or manager how well positioned an organization is to continue operations. These ratios determine a company’s liquidity. Liquidity is the measure of a company’s ability to pay its short-term debt when it comes due.
All of the financial accounting tools mentioned here are used to make solid management decisions: whether to borrow to cover cash needs, invest surplus cash and expand production. Financial data is instrumental in these decisions.
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