Common-size Income Statements
Conversion of the income statement to a common-size income statement facilitates an assessment... Read More
Financial statements use the financial data that is reported in the accounting system to present data in a more meaningful manner. The primary financial statements are: balance sheet, income statement, statement of cash flows, statement of owners’ equity, and statement of retained earnings.
The balance sheet gives us information on a company’s financial position. The other financial statements provide information relating to activities of a company i.e. its profitability, cash flow, and changes in owners’ equity during a period of time.
The balance sheet provides a snapshot of a company’s financial position by showing its assets, liabilities, and owners’ equity at a specific point in time.
The income statement tells us how profitable a company was over a specified period of time. It reports a company’s revenue, expense, and net income or loss during this period of time.
The statement of cash flows presents information on a company’s cash flows over a specified period of time. This, it does by reflecting the company’s cash inflows (receipts) and cash outflows (payments) during a period. The cash flows are categorized according to three groups of business activities: operating, financing, and investing.
The statement of owners’ equity reports the composition and changes in owners’ equity for a company during a specified period of time.
The statement of retained earnings provides information on the changes in a company’s retained earnings during a specified period of time.
The following notes illustrate the interrelationships among financial statements:
Question
Which of the following financial statements provides information which helps to explain the ending cash balance on a company’s balance sheet?
A. The income statement
B. Statement of cash flows
C. Statement of owners’ equity
Solution
The correct answer is B.
The statement of cash flows explains how the ending cash balance on the balance sheet was derived from the beginning cash balance.
Reading 22 LOS 22f:
Describe the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity