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Financial Statements and Their Preparation
Financial statements are records of all financial activities reflect the position of a person, business, or any other entity. Generally, they report an organizations assets, liabilities, and owners capital at any given point. There are four types of statements: the owners equity statement, income statement, statement of cash flows, and balance sheet.
Sequence for preparing financial statements
These statements are all interlinked and dependent, therefore, they are prepared following a specific sequence.
Income statement. It comprises all the profit and loss account details of an entitys revenues, tax costs, and expenses that impact the overall profit (Weygandt, Kimmel, & Kieso, 2015). As such, it includes information from all expense and revenue accounts, and profit and losses made during a financial year.
Statement of owners equity. It gives a snapshot of the profit or loss made by a company that has been retained as shareholders equity (Weygandt et al., 2015). Since the only way businesses can enhance the shareholders equity is by generating revenue, the retained earnings comprise the net profit, less any earnings distributed to shareholders in the form of dividends.
Balance sheet. It describes an entitys assets, liabilities, and shareholders equity (Weygandt et al., 2015).
Statement of cash flows. It is comparatively unique to the other previous statements. This is because, rather than reflecting the change in the value of a company, it explains the changes that have occurred to the entitys cash balance over years (Weygandt et al., 2015).
Interrelationship between statements
Financial statements are compiled in the order listed above since information from one statement can be carried over to another. For instance, the income statements net income is added to the starting balance of the owners capital in the statement of the owners equity. In addition, the owners capital at the end of the reporting period in the statement of owners equity is reported on the balance sheet.
References
Weygandt, J.J., Kimmel, P.D., & Kieso, D.E. (2015). Accounting principles. (12th ed.).Hoboken, NJ: Wiley.
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