Question

Question 1

Describe the purpose of each Financial Statements and explain the relationships among them?

Answer 1

Generally the financial statements means Balance Sheet, Profit and loss Statement / Income Statement and Cash flow statement.

The Balance Sheet shows the financial position of a particular date. It depicts the assets and liabilities as at the closure of a particular date, generally last day of the financial year. Income Statement or Profit and loss statement shows the operation results for a particular period. It contains income details, expenses and the net of operational results. A Cash flow statement is one which narrates the flow of money into and out of the organisation. It differentiate the cash flows as , related to operation activity, investment activity and financing activity.

The financial statements are related to each other. The items of one financial statement may be present in the other financial statements. For example, closing inventory value is present at both income statement and balance sheet. Profit or loss of the income statement is directly forming part of the retained earnings or the share holders fund. The cash flow from operations is completely dependent on the income statement data. Cash flow from investment activity is related to the assets of the financial statement. Cash flow from financing activities is related to the liabilities of the balance sheet. Hence the financial statements are related to each other.