Question

1. How are the different key financial statements interrelated (Income Statement, Balance Sheet, Cash Flow Statement) ?

2. What is the purpose and concept for each of these financial statements?

Answer 1

Solution:-

Financial statements are the statements which reflects the effect of business transaction and event on the entity. The different type of financial statements (Income statement, Statement of change in equity, Balancesheet, Cash flow statement) are not isolated from one another but are closely related to one another.

Balance Sheet-

Balance sheet is directly related to the income statement, cash flow statement and statement of changes in Equity.

Assets, Liabilties and equity balances reported in the Balancesheet at the end consist of-

-Accruals and Prepayments

-Receivables and Payables

-The change in composition of balances arising from inter balancesheet transaction.

-Balance at the start of the Period.

-Increase in Net assets and equity arising from issue of share capital as reported in the statement of changes in Equity.

Income Statement-

Income statement is directly related to the Balance sheet, cash flow statement and statement of changes in Equity. The Profit and loss of income statement is included in cash flow statement under segment of cash flow from operation after adjustments of non-Cash transactions. Net Profit and loss is also presented in statement of changes in Equity(SOCE).

Cash Flow Statements-

It explains the effect of cash at the beginning and end of the reporting period.It also explains the source of funds and utilization thereof. It classify cash flows into three categories- i) Cash flow from Operating activities, ii) Cash flow from Investing activities and iii) Cash flow from Financing activities which can further be used to calculate free cash flows available in an enterprises.