1. Discuss the relationship between the income statement and the shareholders' equity section of the balance...

1. Discuss the relationship between the income statement and the shareholders' equity section of the balance sheet.

Expert Solution

Income statement is prepared to know the income or loss for a period of time.It shows the revenues, and expenses incurred to earn that revenue. Revenues are then matched with the related expenses to calculate the income earned. This income belongs to the shareholders and goes to the shareholder's equity section of the balance sheet in the form of retained earnings. Retained earnings are accumulated earnings / income, during the life of a company that have not been paid out as dividends. Retained earnings can be calculated as per below:

Retained earnings = Net income - Dividends - (or +) prior period adjustments - (or +) retrospective accounting changes.

So, to sum up, income statement gives the earnings / net income for the period. With this net income, we calculate the retained earnings, as per above equation. That retained earnings is a part of shareholder's equity in the balance sheet.

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