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ACC 561 Assessed Discussion Questions Week 2






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ACC 561 Assessed Discussion Questions Week 2
In what ways do the elements of the four elements financial statements interact with
one another?
There are four main financial statements and they are: balance sheet; income
statement; statement of cash flow statement and statement of shareholders’ equity.
The balance sheet show what a company owns and what it owes at a fixed point in
time. The assets reported on the balance sheet can be classed as either current
assets or fixed assets. The liabilities listed represent the portion of a firm's assets
that are owed to creditors. The equity is referred to as owner's equity in a sole
proprietorship or a partnership, and stockholders' equity or shareholders' equity in a
corporation. Income statements show how much money a company made and spent
over a period of time. The information reported on the income statement flows to the
statement of cash flow. For a given period, the statement of cash flow summarizes
sources and uses of cash; indicates whether enough cash is available to carry on
routine operations. It provides the sources of cash, uses of cash, change in cash
balance. The cash flow statement represents an analysis of all the business
transactions of a business, reporting where the firm obtained its cash and what it did
with it. The information used to construct the cash flow statement comes from the
beginning and ending balance sheets for the period and from the income statement
for the period. The fourth financial statement, statement of shareholders’ equity, also
known as the statement of retained earnings, explains the changes in the interests of
the company’s shareholders over time. Retained earnings appear on the balance

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sheet are most commonly influenced by income and dividends. The Statement of
Retained Earnings therefore uses information from the Income Statement and
provides information to the Balance Sheet.
How might changing one of the financial statements affect the other financial
The basic financial statements are the income statement and the balance sheet.
Making changes to the income statement will, in turn, affect the balance sheet.
Furthermore, at the year-end period, all income statement accounts are "zeroed out"
or "closed" to an income & expense summary account. The income accounts have a
credit balance so they would be debited to get to a zero balance. For the expense
accounts, the debit balance would be credited to have a zero balance. It would be
reflected as when the income accounts are debited, the income and expense
summary account would be credited. When expense accounts are credited, the
income and expense summary accounts are credited. At this point, the income and
expense summary account would be debited or credited depending upon the
balance. At the end of the year, the income statement will show either a profit or loss.
The profit (or loss) will get carried over to the balance sheet in the statement of
retained earnings. It is vital to understand this relationship in order to read and
interpret the financial statements it their entirety as they represent the true financial
condition of your business.
Why is it essential to understand the relationship between the financial statements?
Management of any business requires a flow of information to make informed,
intelligent decisions affecting the success or failure of its operations. Investors need
statements to analyze investment potential. Banks require financial statements to
decide whether or not to loan money, and many companies need statements to
ascertain the risk involved in doing business with their customers and suppliers. The
four basic financial statements: balance sheet, income statement, statement of
equity, and cash flow statement are all linked together to help the company distribute
its finances to understand its financial position in more detail.

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Net income from the income statement flows to the statement of equity which then
flows to the balance sheet under the equity section. In addition, net income starts the
beginning balance reflected the cash flow statement and it is then reconciled to cash
from operations by taking the cash based changes in the balance sheet. The ending
balance on the cash flow statement then carries back over to the balance sheet. It is
vital to understand this entire relationship as an entry/adjustment to one statement
because they will all flow through together and be reflected on each statement. If
they are not reflected properly, then the true financial representation of the business
will be quoted inaccurately. When this happens, the company could provisionally
face financial turmoil, based upon inaccurate numbers.

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Excellent resource! Really helped me get the gist of things.