Relationships Among Statements

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.

Financial Statements Explained

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.

Financial Statement Relationships

The following notes illustrate the interrelationships among financial statements:

• a comparison of a company’s balance sheet over two accounting periods allows us to see the beginning and ending amounts of a company’s assets, liabilities, and owners’ equity in the current accounting period;
• the statement of owners’ equity will present a breakdown of any changes in owners’ equity observed on the balance sheet, from one accounting period to the next;
• the statement of retained earnings reflects any changes in retained earnings which would have contributed to any changes in owners’ equity;
• any changes in retained earnings could have stemmed from changes in net income, which is presented on the income statement;
• the income statement provides a breakdown of revenues and expenses which would result in the net income figure that is reflected in retained earnings within owners’ equity appearing on the balance sheet’ and
• the statement of cash flows provides information on the changes in cash flows which occurred during the period based on business activity (operating, investing and financing). It explains how the ending cash balance appearing on the balance sheet was derived from the beginning cash balance.

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