Financial statements description

Financial accounts show how company events and transactions affect the entity. The balance sheet, income statement, and cash flow statement all have a close link. The income statements, on the other hand, explain how the obligations and assets were used throughout the accounting period. Any decline or increase in the net assets of the businesses, when combined with the balances stated on the balance sheet at the end of the accounting period, results in profit or loss in the income statement. After adjusting for the non-cash transaction, this profit or loss is included in the cash flow statement (“How are the three key financial statements related to each other?” 2017). However, the cash flow statements give the cash outflow or inflow over the accounting period of business. It also linked to the balance sheet by explaining effects of change in cash equivalent at the end and the beginning of the reporting period. These are identified by breaking down into different sections such as investments, operating and financial activities.

Moreover, the balance sheet shows the financial position of the business. It gives information about the total assets available in the firm, liabilities and the equity of the shareholders on a particular date. This balances the equation of accounting where assets are equal to both the shareholder’s equity and liabilities. Any increase or decrease in the assets of the business leading to either profit or loss is transferred from the firm’s income statement to the balance sheet. However, every balance sheet item which has an impact on the cash is directly linked to the cash flow statements as it results to either use or source of money. Moreover, the balance sheet acts as an indicator of the net worth while income statement acts as a gauge of profitability (“How are the three major financial statements related to each other?” 2017).

References

How are the three major financial statements related to each other? (2017). Investopedia. Retrieved 27 July 2017, from http://www.investopedia.com/ask/answers/031815/how-are-three-major-financial-statements-related-each-other.asp