Question

explain how the balance sheet, income statement and statement of cash flow interrelated. What ties them together

Answer 1

Balance sheet, income statement and statement of cash flows constitute the fundamental or basic financial statements. All of them are interrelated.

Income statement is prepared first. It provide the net income of the company. This net income is used in calculating the cash from operations in the cash flow statement. Also, net income gets added to retained earnings to be reflected in the stockholder's equity section of the Balance sheet. There are certain non cash items of revenues and expenses like depreciation, loss or gain on sale etc, which are needed from the income statement for calculation of cash flows from operating activities in the cash flow statement. So, in this way income statement provides inputs to the statement of cash flows and the balance sheet.

Statement of cash flows is prepared after income statement. It takes inputs from the income statement as described above and provides output in the form of ending balance of cash to the Balance sheet. Also, the amount of cash dividends paid is given in the cash flow statement, which gets deducted from the stockholder's equity in the equity section of the balance sheet.

Balance sheet is a statement which is prepared after the above two statements are prepared. It takes data from the above two statements. Also, when comparative balance sheets of two year's are given, then statement of cash flows is prepared by taking the increase or decrease in cash due to the items given in the balance sheet by categorizing them as cash flows from operating, investing and financing activities.