How are the income statement and balance sheet related?
In what ways do the elements of the four financial statements interact with one another? How might changing one of the financial statements affect the other financial statements? Why is it essential to understand the relationship between the financial statements?
What are the purposes of a statement of cash flows and what three types of activities are summarized in the statement of cash flows?
Here is a list of the Four statements and a brief explanation of their purpose. Below is how these statements are related.
* Balance Sheet - statement of financial position at a given point in time.
* Income Statement - revenues minus expenses for a given time period ending at a specified date.
* Statement of Owner's Equity - also known as Statement of Retained Earnings or Equity Statement.
* Statement of Cash Flows - summarizes sources and uses of cash; indicates whether enough cash is available to carry on routine operations.
Cash Flow Statement
For a given period, the cash flow statement provides the following information:
• Sources of cash
• Uses of cash
• Change in cash balance
The cash flow statement represents an analysis of all of the transactions of the business, reporting where the firm obtained its cash and what it did with it. It breaks the sources and uses of cash into the following categories:
• Operating activities
• Investing activities
• Financing activities
The information used to construct the cash flow statement comes from the beginning and ending balance sheets for the period and from the income statement for the period.
Statement of Owners' Equity (Statement of Retained Earnings)
The equity statement explains the changes in retained earnings. Retained earnings appear on the balance sheet and most commonly are influenced by income and dividends. The Statement of Retained Earnings therefore uses information from the Income Statement and provides information to the Balance Sheet.
The following equation describes the equity statement for a sole proprietorship:
Ending Equity = Beginning Equity + Investments - Withdrawals + Income
The income statement presents the results of the entity's operations during a period of time, such as one year. The simplest equation to describe income is:
Net Income = Revenue - Expenses
Information from the Income Statement flows to the Cash flow statement.
The balance sheet is based on the following fundamental accounting model:
Assets = Liabilities + Equity
Assets can be classed as either current assets or fixed assets.
Liabilities represent the portion of a firm's assets that are owed to creditors.
Equity is referred to as owner's equity in a sole proprietorship or a partnership, and stockholders' equity or shareholders' equity in a corporation.
Sole Proprietorship: John Doe, Capital
Partnership: John Doe, Capital
Josephine Smith, Capital
In the case of a corporation, equity would be listed as common stock, preferred stock, and retained earnings.
The balance sheet reports the resources of the entity. It is useful when evaluating the ability of the company to meet its long-term obligations.
Information from this statement flows to the Statement of Owner’s Equity.
I hope this helps!!
Associates Degree, 3.6 GPA