Description
Respond to the following questions in approximately 50 words or more (total words for the assignment):
In what ways do the elements (numbers) in the four financial statements interact with one another?
How might changing one of the financial statements affect the other financial statements?
Why is it essential to understand the relationship between the financial statements?
One systematic way to approach the question is to start listing the combinations of numbers that agree directly between the statements. For example,
Balance sheet related to cash flow:
1. The year end cash balance on the balance sheet is also the ending cash balance on the cash flow.
2. The prior year ending cash balance on the balance sheet is also the beginning cash balance on cash flow.
These are just examples. There are many relationships between the numbers on the balance sheet and the cash flow statement. You can list the possible combinations of two statements (e.g. balance sheet, to income statement, cash flow and statement of changes in stockholders' equity; income statement to cash flow and changes in stockholders' equity and so on) and then identify as many interactions as possible. In this manner, I can identify dozens of direct relationships and agreements of amounts between the various statements. Provide at least four examples not including the two examples I gave above.
Explanation & Answer
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Running head: FINANCIAL STATEMENTS
1
Interaction of four financial statements
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FINANCIAL STATEMENTS
2
Question 1
The four financial statements interact in various ways. First, an interaction between an
income statement and cash flow is manifested in the treatment of the net income. While the
income statement is used to show the net income of the company, the same net income figure
begins in the preparation of cash flow statement. A balance sheet ...
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