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Understanding Relationships of Financial Statements

Understanding Relationships of Financial Statements

Understanding the Relationship Among the Financial Statements. The statement of financial position, the income statement and statement of cash flows all are based on the same transactions. But they represent the different views of the company. These statements are not alternatives to each other rather they are all important regarding presenting the key financial information of the enterprise.

accounting Ledger Balance Sheet

Understanding Relationships of Financial Statements

This diagram indicates the relationship among the financial statements. The arrow directed from net income to retained earnings shows under the head of owner’s equity in the ‘balance sheet.’ The balance of investing activities in cash flow statement will show the partial balance of land and plant purchased during the period. This is known as articulation.

Three financial statements present important information. They do not include all possible information. Financial statements, in particular, can be thought as a lens through which a company’s financial position can be understood. Financial reports allow you to focus on the financial aspects of the business.

In above diagram, the closing balance of cash would be the same as in balance sheet. The net balance of operating activities shows the activities of revenues and expenses, and ultimately it is explaining the net income. The balance of financing activities is reported in capital stock and other liabilities in the balance sheet. Cash flow statement is mostly related the balance sheet.

It is apparent from the given diagram the financial statements are interrelated. The income statement explains the usage of the assets and liabilities in the stated accounting period of the company. The cash flow statement explains cash inflows and outflows, and it will ultimately reveal the amount of money the company has on hand, which is also reported on the balance sheet. Each financial statement only provides a portion of the story of a company’s financial condition, and they all together provide a complete picture of the company’s financial situation.

These three financial statements relate to the period which they cover. The following diagram can explain it.

Accounting Timeline

The above line shows the period maybe a month or a year. It is evident that you prepare the statement of financial position at the beginning and the ending period of the business. That gives the static look of financial health where the company stands. The other two financial statements cover the middle period between two balance sheets to explain the important changes occurred during the period.

If we understand the financial standing of the company at the beginning and the end of the period and if we also know the changes occurred during that period that affected profit-seeking, and cash performance then, we can assess and forecast the future cash flows. Such information is useful to all stakeholders like investors, creditors, management and others. – Understanding Relationships of Financial Statements


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