In every year, companies prepare financial statements such as the balance sheet, income statement and cash flow statement so as to determine its financial position. It also helps in ensuring that the operations of an organization are carried out effectively.
Generally accepted accounting principles
These are the rules, procedures and conventions used to define the acceptable practice that should be followed in accounting. They are commonly accepted for recording and reporting the accounting information and are imposed on the investors so that they can consistently analyze the financial statements of the companies. It involves issues such as revenue recognition, balance sheet item classification and other outstanding share requirements. It is important in financial statements as its used to help in maintaining the aspect of credibility to the external users of financial statements such as the stockholders; creditors and security analyst so that company’s financial report portrays its financial position. The certified public accountants use the rules to audit various companies in the accounting profession.
Refers to the original monetary value of an item.Under this type of accounting the assets and liabilities are recorded at the values when they are acquired. The costs of items in the income statements are based on the historical cost.The items are used and sold at historical cost rather than on their replacement costs.It importance to the financial statements are that it helps in determining the values of items within it.
Accrual basis versus cash basis of accounting
The accrual basis is the type of accounting that states that income is reported at the time when it is earned in the fiscal period regardless of the time when payments are received. The expenses are deducted during the period when they are incurred regardless of whether they are paid or not therefore revenues and expenses are recorded in the period when they occur. In the cash basis of accounting the revenues are recorded in the period when the cash of a transaction are received and expenses are actually paid. They are both used in measuring the net income of an organization.
Current assets and liabilities versus non-current items
Barry and Jermakowicz (2007) noted that assets refer to the things that a company owns and that provide expected benefit to an organization. They are classified into current and non-current assets.Current items can be used by a business or be converted into cash within one business cycle of a period of one year. It includes cash and cash equivalents, short term investments, accounts receivables and inventories. A current liability refers to the liabilities that occur for a short period of time especially for a period of one year. They include accounts payable, employment income, sales taxes, salaries payable, federal and state unemployment insurances.
Noncurrent items include fixed assets and long term liabilities. The fixed assets are the asset that that cannot be easily converted to cash, but they are changed over a long period of time. It involves: equipment, vehicles and fixtures. The long term liabilities are the liabilities that are incurred over a longer period of time as they are used to sustain the effective operations of an organization. It involves bank notes and loans that mature over a period of more than one year.Their usefulness to financial statements is that they assist in ensuring resources necessary for undertaking operations within an organization are available during the financial period of an organization.
Amazon Company is an American company that deals with electronic products, computer software, video games, apparel furniture, and food toys. It is situated in Seattle Washington and is one of the largest online retailers whose annual sales are more than those of the Staples Corporation. It was started in 1995 as an online bookstore that later on diversified its operations to sell other different kinds of products in the market.It websites are found in Canada, United Kingdom, Germany, France China and Japan.
Toyota Company is a company that deals with automobiles. It has its headquarters in Toyota city, Nagoya, and in Tokyo. It has employed over 316,000 employees who manage the operations of the organization. It was founded in the year 1937 by Kichiro Toyado.It provides services such as financial services, through a division Toyota financial service and also creates robots for its customers.
Dell Company is a company that deals with developing, manufacturing, selling and supporting the personal computers. It is situated in Round Rock Texas and employees are over 82,700. It sells products such as personal computers, servers, data storage devices, network switches, and software and computer peripherals.
It refers to the financial statement that shows a summary of persons or the organizations financial balances. It consists of three parts that are known as assets, liabilities and the ownership equity. The values of each account of items in this statement are maintained through using a system that is known as the double entry booking system.
Amazon balance sheet showed that both its current and fixed assets were increasing from the year 2002 to the year 2007.This was an indication that the company was running its operations effectively and would meet its current obligations as they arose. The liabilities also increased within the specified period of time since the management of the organization could generate financial resources that would be used in running the operations of the organizations. Dells company balance sheet showed that the number of assets were high since the management utilized them in running the operation hence the drastic improvement in companies performance. It was also noted that Toyotas balance sheet had its assets and liabilities increased each financial year therefore could run its affairs cost effectively.
Loth (2009) found out that financial statement shows the way revenues or money received from the sale of products and services are generated before the expenses are deducted in order to derive net income. Its purpose is to assist the managers and investors on how a company has made or lost money during a financial period of a company. It is used by the investors and the creditors to determine its past performance and to assess its ability to generate cash flows in the future.
Amazon historical financial statement showed that the company’s :net sales, gross profit, net income had been increasing from the year 2002 to 2007,but in the year 2006 there was a slight change since the net income had declined from $359 to $190 this was an indication of declined performance of the organization. Dells income statement had been increasing from the year 2005 to the year 2008 as this was portrayed by the increase in gross profit, although the net income increased in the year 2005 and 2006 and later on declined in the year 2007.There was remarkable improvement in the performance of the Toyota company since the income statement increased significantly during the year 2005 to 2008.
Statement of cash flows
According to Heakal (2009) he stated that cash flows are financial statement that shows how a company’s cash flows within an organization as transactions are being undertaken. Cash inflow is the money that goes out of a business while cash outflow is the cash that goes out of a business. The statement of cash flows is used to determine the company’s viability of operating in the future in terms of paying up its bills. Dells cash flow statement in the year 2008 showed a slight decline in cash and cash equivalents this was due to poor management since in the previous year was quite high.
Amazon cash flow statement is a financial statement that showed that the cash and cash equivalents were increasing from the year 2002 to the year 2007 since the management of the company had been undertaking its operations effectively hence the improved performance. This case also applied to Toyota Company where it recorded improvement in its performance.
Net income is better than the cash from the operating activities this is because it indicates the revenues earned by an organization together with the expenses incurred as a result of running the affairs of the organization. Cash from the operating activities only takes into account the activities in cash flow statement that involve production, sale and inventory of a company’s products and the collection of payments from the customers.
The Dells company strategic goal has been to determine its level of competitiveness and growth. It has now been dwelling of democratization of technology through various ways such as listening and reacting to the customers’ needs. The financial forecasts of Toyota Company have been to determine the economic conditions and market demand that have been affecting its competitive environment; it has been tackling issues that have been causing the political instability of an organization which have been affecting its performance. Amazons future strategy has been to develop its customers, make bold investment decisions in the long term considerations and also hiring and retaining employees who can manage and implement policies that are beneficial to the organization.
It has been noted that the preparation of financial statement helps in determining the performance of a company and the trend of its past performance. It is therefore important that companies prepare financial statements so as to review the operations of an organization appropriately.
Barry E.J.and Jermakowicz, E. K. (2007). Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons. pp. 931.
Heakal, R. (2009). What Is A Cash Flow Statement? Web.
Loth, R. (2009). Understanding the Income Statement. Web.