Question

What is meant by articulation between financial statement elements?  How does articulation relate to an entity’s financial statements?

Answer 1

Articulation refers to the flow of information between Balance sheet and income statement of the company. It states that the balance sheets and the income statements of any organization are mathematically described in a way that the net income stands equal to the owner’s equity for that specific period of time.

The financial statements of an organization are not isolated items, they are closely related and flow between each other in order to present a larger picture of the financial circumstances of a business. Though each statement can stand alone and can provide a snapshot of the given information. But separate from each other, they do not provide an in-depth view of the whole financial position of the company. Thus, articulation stands important in this case.

The entity's financial statements articulates in following manner:

Balance sheet: The Balance sheet of an organization is directly linked to all other Financial statements of the organization, i.e. Income statement, Statement of Cash flow, Statement of changes in equity. It provides the information about changes in assets, liabilities and equity during a specific period, usually an year. The increase or decrease in assets can be calculated from net profits, which is reached by Income statement, increase or decrease on equity from share capital can be found out with the help of statement of changes in equity.

Income statement: Also known as Profit and Loss statement, it is also linked with all the financial statements. The recorded increase or decrease in net assets calculated from the profit and loss, which is reported in the income statement is the balance of assets transferred to the balance sheet for the period end. The profit and loss in the income statement are also recorded in the cash flow statement along with the statement of changes in equity.

Statement of changes in equity: It is directly related to Balance sheet and income statement and indirectly with cash flow statement. The movement of equity which takes place on balance sheet is also recorded in the Statement of changes in equity. The change in value of equity is also recorded in the income statement as well as surplus from revaluation.

Cash flow statement: Cash flow statement is primarily Linked with Balance sheet. There is a reflection of increase or decrease in cash flow due to changes in share capital, retained earnings, long-term loans, working capital, etc.

The statements should be prepared in a well-organized manner in order to let the information flow in the precised manner. At last, it can be said that financial statements have no separate existence and must be articulated with each other in order to provide a bigger and better picture of the organization.