1. How does the income statement tie to the statement of stockholders' equity? 2. How does...

1. How does the income statement tie to the statement of stockholders' equity?

2. How does the statement of stockholders' equity tie to the balance sheet?

3. How does the balance sheet tie to the statement of cash flows?

Solutions

Expert Solution

1. The Income Statement is one of the financial statements prepared for showing the revenue and expenses for a particular period and correspondingly provides the net income / net loss for the period. This net income figure is used to arrive at the figure of stockholders' equity as it is added to the retained earnings figure and then retained earnings is added to common and preferred stock to compute stockholders' equity.

2. The Statement of stockholders' equity constitutes a major part of the balance sheet of the company. It is added to liabilities section (both current and long term liability) and the sum of both equals the total of assets section and thus the balance sheeet is balanced.

3. The Balance sheet forms the basis for preparing the statement of cash flows. Net profit figure is taken from the balance sheet to start computing cash flows from operating activities. Likewise, changes in current assets and current liabilities is also considered to arrive at the figure of cash flows from operating activities. Changes in fixed assets figure leads to calculation of cash flows from investing activities. Also changes in stockholders' equity amount as well as long term liabilities helps in the calculation of cash flows from financing activities. Finally, the figure of opening and closing cash balance is used to verify that inflow and outflow of cash is appropriate.

ekkarill92 answered 1 year ago

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