Importance of validating information
It highlights what resources are owned by a business and what it owes to other parties.It also shows how much has been invested in the business and what the sources of that investment were.If the balance sheet is a snap shot, think of an income statement like a photo album of the business activities.That photo album is like a story of what financial transactions took place in a particular time frame, and what the overall results of the transactions actually were.Businesses have two primary objectives: to remain solvent and to earn a profit.A company's solvency is the ability of the business to pay its bills and service its debt.
The Balance Sheet shows a particular point in time.The Statement of Cash Flows explains the change in the company's cash during the time interval indicated in the heading of the statement."It is meant to help managers and investors understand the relationship of net income to change in cash balances."(Holmgren, Sundem, Elliott, Philbrick, 2006, pg.185) This report is split into three sections: Operating activities, which explains how a company's cash has changed due to operations; investing activities, refers to amounts spent or received in transactions involving long-term assets; and financing activity, which shows such things as cash received from long term debt, or most commonly through the issuance of stock. It explains where a company's money came from, where it is now, and where it is going, but the root of it all begins with bookkeeping.The balance sheet does not apply to the future only to the present point in time.Retained earnings statements are forms that show the balance of initial earnings, any changes that took place and the resulting balance of that.