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Financial Statements and Transactions

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Financial Statements and Transactions
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Financial Statements and Transactions
Financial records provide short and long-term information indicating the flow of cash inside and outside the business. All transactions are recorded through a data entry process which makes up day to day bookkeeping, while comprehensive information is entered into a ledger with time (Gheorghe, 2014). The activity of selling and buying facilitates company’s daily financial transactions, hence the source of monetary equations which forms financial statements. Business events such as accounting processes have economic impacts on the financial statements as discussed below.
The impacts of Accounting Transactions in Financial Statements
Any transaction that involves recording liabilities, equity or assets affects financial statements like the balance sheet. The balance sheet of a business reflects an economic standpoint of a running company. When transactions like purchasing assets for cash takes place, a significant influence on the balance sheet would be a reduction in cash account while fixed assets account increases. Cash and assets transactions are recorded on one portion of a financial statement. When cash represents current assets, fixed assets, on the other hand, are considered to be long-term assets. Similarly, the sale of a fixed asset for cash will influence balance sheet records in the same manner. However, an accumulated depreciation, if any, are removed from the book and cash account increases by a sale price.

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When the sales differ from the book value, the difference is recorded as a loss or gain, and the results are recorded on the income statement.
Elements and Purpose of Financial Statements
The components of financial statements such as the balance sheet are assets, liabilities, equity, revenues, and expenses. Assets are items of economic value which business controls, and are expected to generate benefits. Liabilities are legally binding items which an organization owes to other parties. The amount invested by business owners plus the returning is termed as equity. Whenever there is an increase in an asset or a decrease in liability induced by services or goods sold to customers a revenue is generated. Expenses, on the other hand, are deductions in the value of an asset.
The purpose of financial records is to aid in making credit decisions. For instance, lenders use financial information from income statements to assess whether a business is in a position to meet extended credits. (Palácios, Fernandes, Gonçalves, Gonçalves & Sousa, 2017). The use of a balance sheet, on the other hand, is to reveal business financial status after a specified period. Through economic equations, companies can determine whether there are loss or gains in the operations. The government makes tax decision by assessing business incomes, as illustrated in financial records such as cash flow statements. Financial statements like a change in equity enable individuals to perceive information like organization’s ability to pay, hence encouraging activities like union bargaining process.
Components and Use of Financial Analysis
Profit is one of the elements of economic analysis. The success and survival of any business can be illustrated by quality and consistent benefits produced over a specified period. Profit margin allows a company absorb shocks to goods sold with an ability to pay all expenses. Accrued benefits are arrived by deducting the cost of products sold and expenses from another component of financial analysis known as revenue. Also, operational efficiency is another element that measures how well a business utilizes its resources. Lenders and investors use capital efficiency and solvency to make their entrepreneurial decisions (Entwistle, 2015). Financial analysis techniques are used by investors or firms that run a small business to evaluate financial information of a target company and weigh decisions. By examining the financial statements, potential investors can understand opinions about investment value and future performance

References
Entwistle, G. (2015). Reflections on Teaching Financial Statement Analysis. Accounting Education, 24(6), 555-558.
Gheorghe, D. (2014). Estimation of The Balance-Sheet Elements – Essential Requirement in Assuring the Real Image of The Enterprise Patrimony as Offered by Annual Financial Reports. Economics, Management & Financial Markets, 9(1), 403-412.
Palácios, H., Fernandes, J. S., Gonçalves, C., Gonçalves, G., & Sousa, C. (2017). The influence of ethical dilemmas in the accounting. Tourism & Management Studies, 13(3), 49-57. doi:10.18089/tms.2017.13306

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