Question

How do you think the financial reports (Balance Sheet, Statement of Operations, Statement of Chages in Net Assets, and Statement of Cash Flows) are interrelated

Answer 1

Fnancial reports contain various reports such as Balance Sheet, Statement of Operations, Statement of Chages in Net Assets, and Statement of Cash Flows. Though these are separate sub-reports of financial reports, all are inter-linked to each other because Statement of Operations (which is nothing but the income statement) for the reporting period is prepared on accrual basis whereas Statement of Cash Flows is prepared on cash basis to trace reasons for change in cash balance between two consecutive reporting periods but taking financial statements such as Statement of Operations and Balance Sheet as bases.

Balance sheet shows firm's financial position as at reporting date and Statement of Operations shows operating results for the reporting period. Still, many components on balance sheet are inter-related with components shown on Statement of Operations. For example, Retained Earnings appearing on Balance Sheet is nothing but the accumulated profits earned or losses suffered by the firm over a period time. Such profits or losses of the firm can be traced from Statement of Operations of those reporting periods only. When some assets or an asset is sold, gain or loss on such disposal of asset will be reported as an expense or income respectively on Statement of Operations. For each reporting period, assets will be depreciated or amortized as the case may be, by charging such depreciation or amortization as expense on Statement of Operations and reducing value of assets to the same extent.

Similarly, when there is an uncollectable accounts receivable, it will be shown as an expense on Statement of Operations and reduced from accounts receivable balance on Balance Sheet. Like this, many transactions reported on Statement of Operations, either as expense or as income, will have relation with components reported on Balance sheet.

While preparing Statement of Cash Flows for the reporting period, firm's net income reported on Statement of Cash Flows will be taken as the starting point. Changes in Net Assets, or in other words changes in working capital, will be adjusted against net income to calculate net cash flows generated or used in operating activities. Even non-cash expenses or incomes resulted out of disposal or assets reported on balance sheet and statement of operations shall be adjusted against net income to calculate net cash generated or used in operating activities for the reporting period concerned.

Statement of Cash Flows contains three blocks such Cash Flow from Operating Activities, Cash Flow from Investing Activities and Cash Flow from Financing Activities. Out of the three, Cash Flow from Investing Activities contain details about cash generated by selling non-current assets such as fixed assets, intangible assets, etc. and cash used to purchase non-current assets, etc. to calcualate net cash generated from or used in investing activities. Cash Flow from Financing Activities contains details about dividends paid or common stocks issued or redeemed, etc. which are traced from balance sheet and statement of operations.