Question

In what ways do the four basic financial statements relate to one another? Given the general emphasis on the “bottom line” of the Income Statement, why do you think the SEC requires publicly-held companies to include all four, as well as the related footnotes?

Answer 1

Four basis financial statement are profit and loss account or income statement, Balance sheet, cash flow statement and statement of changes in equity.

Four basic financial statements are all related to each other. Profit and loss account shows the amount of profit earned by an organization and is included in the balance sheet under retained earnings. Apart from that amount of accrued and prepaid expenses are shown in the Balance sheet as current liabilities and current assets respectively. Cash flow statement on the other hand shows the amount of cash received and paid under different heads to finally show the amount of cash in hand at the end which is shown in the Balance sheet. The items of incomes and expenditures provided in the profit and loss account are considered while preparing cash flow statement. Statement of changes in equity shows the changes in amount of equity and thus, profit or loss from profit and loss account and equity share capital of Balance sheet are must to prepare statement of changes in equity.

SEC requires publicly held companies to include all four basic financial statements a s well as related footnotes as these are in combination helps the users of financial statements to correct appraise the financial position and performance of an organization.