Question

Carefully explain how the three financial statements are related to each other and how they are explicitly integrated into each other and be specific.

Answer 1

The three financial statements are income statement ,cash flow statement and balance sheet. The income statement gives a synopsis of the revenues and expenses of the business from various operating and non-operating activities.

The balance sheet provides a snapshot of the Assets and liabilities of the firm as on a particular date. The cash flow statement summarises the cash inflows and outflows of the business.

The income statement is prepared on accrual basis and hence it does not provide the cash flows of the business. The net income is adjusted for non cash expenses such as depreciation and changes in working capital to arrive at cash from operating activities which is displayed in the cash flow statement. The cash flow statement also depicts the cash from investing activities which can be derived from the fixed asset values from the balance sheet. The Firm may also have made other investments which are visible on the balance sheet. Finally the cash flow statement depicts the cash from financing activities which shows the interest and dividend payments derived from income statement and changes in equity and debt derived from the balance sheet. The net income which is retained for the growth of the business is transferred from the income statement to the equity section of the balance sheet.

In this manner we see that the three financial statements are closely related to each other and integrated with each other.