Question

Explain how the income statement and the balance sheet are related. Provide an example that demonstrates your understanding of the importance of utilizing both statements to describe the performance of an organization.

Answer 1

Relation between the income statement and balance sheet:-

1. Income statement give information about the income earned and expenses incurred for a particular time period and the profits or loss earned for that period of time will be evaluated in this statement

2. Balance sheet :- this gives information about the assets, liabilities and owner's equity in the organisation.

3. The relation is performance is evaluated in the income statement and the result of the income statement will be carried to Balance sheet.

income statement and balance sheet both combinely presents the performance of the financial position of the organisation.

Importance of utilising both the statements combinedly :-

1. The uses of financial statements may observe several points for calculating the value of the organisation.

2. Users of financial statements get information regarding profits earning return of income given by the organisation in income statement.

3. Other type of users of financial statements get information like network of the organisation from balance sheet

4. There are some other type of users of financial statements to calculate financial ratios for evaluation of performance of organisation

Example :- earnings per share, profit margin ratio. For calculation of these ratio we need the information from both the income statement and balance sheet.

These are all the information required to solve the given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.