Question

do balance sheets, income statements, cash flow statements, and statements of shareholders' equity share the relationship to each other? if not, explain why?

Answer 1

Yes they do share relationship with each other.

Amongst these, we first prepare the income statement to get the amount of net income/ loss earned/incurred during the period.

Then we transfer such income/loss to statement of shareholder's equity to get the ending balance of retained earnings account.

Then we use the retained earnings balance in the balance sheet to get "Total Liabilities and Stockholder's Equity"

At the end, we prepare cash flow statement. Here we accumulate all cash inflows and outflows that take place during the year and arrive at the ending cash balance figure by adding "net increase/ decrease in cash and cash equivalent" with " beginning cash balance".

A thing to remember here is although these statements are related to each other, but there's a difference between cash flow statement and the remaining three statements. Cash flow statement is prepared following cash basis of accounting and the rest of the financial statements are prepared following accrual basis of accounting.