Question

Define and explain the components of and relationship among the income statement, statement of changes in owner's equity, balance sheet, and cash flow statement. Please write at least a paragraph describing each of the reports, and a paragraph describing the relationships among the reports.

Answer 1

Solution. Financial statements are recorded and analysed to evaluate company's financial position.

We will enlist below definition and relationship among the income statement, statement of changes in owner's equity, balance sheet, and cash flow statement:

Income Statement represents a company's revenues and expenses during an accounting period. Net profit/loss generated by deducting expenses from revenues. The profit earned or loss incurred is then shown as movement in equity between the opening and closing balance sheets of the business. The increase/decrease in net assets of a company is incorporated in the balance sheet at the accounting period end. Cash flows from operation is included in the cash flow statement. Net profit/loss is transferred and recorded in the statement of changes in equity during an accounting period.

Statement of changes in owner's equity reports changes in the equity(difference between the value of the assets and the value of the liabilities of owner) during an accounting period. It reports in the increase/decrease in stockholder's equity during an accounting period.It is prepared after the income statement.The amount is recorded as owner's equity along with liabilities on the credit side where as assets on the debit side of balance sheet.

Balance Sheet is the reporting of financial balances of a company by recording company's total assets on the debit side and liabilities & owner's equity on the credit side. A balance sheet is a summary of the financial balances of a company. It encompasses balances in the beginning, increase/decrease in net assets as a result of net profit/loss reported in the income statement, increase/decrease in net assets as a result of net gains/loss recorded in statement of changes in equity along with increase/decrease in net assets and equity from the issue of share share capital/payment of dividends presented in the statement of changes in equity.

Cash Flow Statement encompasses changes in the income on the income statement and changes in the balance sheet accounts of a company. It shows the amount of cash and cash equivalents getting in and leaving a company.Three sections under cash flow statement- cash from investing activities,cash from operating activities,cash from financing activities.

Therefore,we can conclude from above,the different types of financial statements are closely related to each other.