Question

The Effect of Tax on the Financial Statement

List how the major financial statements are related and explain how the four major financial statements are related?

Answer 1

There are four major financial statements are:

(1) Balance sheets – A balance sheet represents what a company owns and owes at a fixed period of time.

(2) Income statements – This shows how much is made by the company and spent by the company over a period of time.

(3) Cash flow statements – This record all the exchange of money made between a company and other foreign organisations over a period of time.

(4) Statements of shareholders' equity – This record all the changes made in the interests of the company’s shareholders in a period of time.

All the information provided in the balance sheet, income statement and cash flow statement are used to calculate essential financial ratios in order to get company’s financial performance and all the issues that are needed to be considered. Each of the financial statement provide different details containing information that is all interconnected. All together these statements give the comprehensive structure of all the operating activities of the company.

The major financial statements are essential in order to understand and analyse the company’s performance from every situation. The income statement give a deep analysis of all the core operating activities that are responsible for generating earnings for the company. On the other hand, the cash flow statement and the balance sheet focus more on the capital management of the company in terms of both assets and structure. Thus all the companies on top achieve highest in operating efficiency, managing assets and capital structuring. This relation of these financial statements makes the reporting of statements more important for the company.

All the financial statements are prepared separately using different rules and accounting policies but they are all related. For instance,

a) The changes in assets and liabilities in the balance sheet are also reflected in the revenue and expense in the income statement that results in company’s gain or loss.

b) Cash flow statement provide more information about the cash assets that are listed on the balance sheet and are related to net income figured in the income statement.

The financial statements are incomplete without each other and become a powerful source of information for the investors when they are related to each other.