Question

M7. Financial Statements Homework

Discuss the interrelationship among the income statement, balance sheet, and statement of cash flows.

• Write a minimum of 250 and maximum of 300 words.

Answer 1

The income statement, balance sheet and cash flow statement are financial statements prepared by a company.

They help us interpret the financial position of the company.

Investors use financial statements to make financial decisions about the company by knowing the status of its operations.

Income statement let us the revenue and expenses for the period. It's the NET result is net income.

The net income from the income statement is transferred to the balance sheet under shareholders funds. Under shareholders funds, it is kept under reserves and surplus. Reserves and surplus accumulate from time to time as and when net income is transferred from the income statement to balance sheet.

The balance sheet tells us the status of assets and liabilities for a particular date.

Any unaccrued income or expenses is transferred from balance sheet to income statement, during the period when they accrue. Unaccrued expenses such as rent paid in advance is an asset in the balance sheet. It is shown under expenses during next year.

So one component of the Balance sheet is linked to another component of Income statement in such a way.

Cash flow statement shows the cash flow from operating, financing and investing activities.

Cash flow from financing and investing activities are taken from the balance sheet.

Cash flow from operating activities is taken from the income statement.

All the 3 financial statements are interlinked and work together to provide insightful information about the company.