How The Three Important Financial Reports Are Used In Financial Accounting
Accounting is important in personal finances because it shows clearly and tangibly how a person is doing financially and what financial …show more content…
Describe the three products of accounting and bookkeeping procedures that are
Three important financial statements are used in accounting. They are the income statement, the cash flow statement, and the balance sheet (Siegel & Yacht, 2009, p. 42). Each financial statement has its advantages and disadvantages. Each one is unique and presents different features, however, they are all useful in financial planning, and they build on each other. Each one presents a clear picture, but seen together they offer a complete picture of the financial situation. (Siegel & Yacht, 2009, p. 49).
Siegel and Yacht (2009) state that: “the income statement summarizes incomes and expenses for a period of time.” (p. 42). The income statement lists the income gained as most useful in personal financial planning.
wages or as salary, all living expenses, and all total interest expenses. Net income is the result obtained on an income statement. It is obtained by subtracting the disposable income from total living expenses and total interest expenses. The disposable income, by the way, is the income obtained after all taxes are subtracted from gross wages. It is worth noting the following: when the income is higher than the expenses, there is a surplus. When it is less, there is a deficit. (Siegel & Yacht, 2009, p. …show more content…
42). On the cash flow statement figures three types of cash flows: operating, financing, and investing. (Siegel & Yacht, 2009, p. 48). Only the financing and investing cash flows are nonrecurring, while operating cash flows are recurring. The cash flow statement is very useful in assessing liquidity and in determining how liquidity can be increased (Siegel & Yacht, 2009, p. 45).
The balance sheet is a very important financial statement because it plays a role “in assessing the current situation by listing all assets, liabilities, and equity, at a given point in time, [and] by providing a concise picture of financial condition at that time.” (Siegel & Yacht, 2009, p. 46). In personal finance, assets = debt + net worth. When assets are higher than debt, assets minus debt is positive, and the net worth is positive. When assets are less than debt, assets minus debt is negative, and the net worth is negative. In this latter case, personal bankruptcy occurs.
These financial statements differ as