Accounting Deals With Financial Transactions Research Paper

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The Statement of Owners' Equity

The statement of owner's or shareholders' equity is designed to show the components of the change in equity from the end of one fiscal year to the next. Beginning with the amount of equity shown at the end of the previous fiscal year, net income is added and cash dividends paid to the owners are subtracted. If owners contributed any additional capitol this amount (such as the sale of new shares) it is added to the equity. On the other hand, if the owners withdrew capitol, equity declines. All the additions and subtractions, taken together, equal the changes in owner equity from one fiscal year to the next (Kurtz, 2010).

The Statement of Cash Flows

Public companies are required to prepare and publish a statement of cash flows. This statement provides investors and creditors with relevant information about a firm's cash receipts and cash payments for its operation, investments, and financing during an accounting period. Statements of cash flows are prepared due to the widespread use of accrual accounting, which recognized revenues and costs when they occur, not when actual cash changes hands.

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As a result there can be a difference between what is reported as sales, expenses and profits and the amount of cash that actually flows into and out of the business during a period of time. This statement can provide investors and other interested parties with vital information. For example if a firm's income statement reports rising earnings, yet at the same time the statement of cash flows shows that the firm's inventory is rising faster than sales, this could be an indication that demand for the firm's products is softening, which may be a sign of impending financial trouble (Kurtz, 2010).

Conclusion

All of the four financial statements are interactive. Each one affects or is affected by the other in one way or another. Even though they each serve a unique purpose, they all have one common goal, to evaluate the health of a business......

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