Question

what is the relationship/linkage among the balance sheet, Income statement and statement of cash flows? (How these 3 fiancial statements linked?)

write a paragraph

Answer 1

The order in which financial statement are prepared is income statement, balance sheet and statement of cash flows. Income statement determines the net income and includes temporary accounts which are transferred to retained earnings of the balance sheet. Retained earnings is the internal capital generated which includes accumulated net income over the years. Thus, balance sheet is linked to income statement in order to calculate net income so that both side of balance sheet can tally. The income statement and balance sheet are used to calculate changes in cash during the year which is presented in the statement of cash flow. Cash flow statement shows cash flow from three activities namely operating, investing and financing. The cash flow from investing and financing activities can be determine by comparing two year balance sheet for changes in balance. The cash flow from operating activities is determined by using the income statement and two year period balance sheet. Net income would show cash generated from business activity and balance sheet would reflect changes in working capital. Thus, cash flow statement is prepared after balance sheet is completed. Thus, in this way the three financial statement are linked to each other.