Question

Why must the income statement be prepared before any of the other financial statements?
Because EPS has to be reported to shareholders quickly to avoid a drop in stock price
Because it is a tradition.
Because you need net income to finish other financial statements.
Because net income is the most important number in accounting.

Answer 1

"Because you need net income to finish other financial statements" is the correct option

Reason:

For aforesaid option being correct - Because net income is transferred to reserve and surplus which then forms a part of balance sheet and also net income is used as a starting point while preparing cash flow statement.

For the remaining options being incorrect -

• Because EPS has to be reported to shareholders quickly to avoid a drop in stock price - EPS is actually reported to shareholder along with other financial statement so this is not the reason for preparing the income statement before other financial statement.
• Because it is a tradition - There is no such tradition to prepare income statement before any other financial statement.
• Because net income is the most important number in accounting - Net income is indeed an important number in accounting but that has nothing to do with preparing the income statement before other financial statement.