Financial Statement Relationship Accounting and financial statements are the language of business. Financial statements provide information to help users such as managers and investors analyze accounting data to help make decisions, manage risk, and predict future outcomes. This week’s paper Team B will discuss how the statement interact with one another, how changing one affects other statements, and the importance to understand the relationship between the statements.
Financial statements are demonstrated in four different financial statements, which are balance sheet, income statement, retained earnings, and statement of cash flows.A balance sheet illustrates a financial picture at a point of time of what a business owns, which are the assets and what it owes, which are the liabilities. The income statement portrays how well a business performed during a period of time; and it reports revenue and expenses. The retained earnings statement indicates how much dividends are distributed and how much was retained in the business for future growth. Finally, the statement of cash flows presents the cash use in a business (Kimmell, et al, 2009).
How the Statements Interact with One Another The financial statements are all tied together to inform the company of its financial standing. There are several interactions within the financial statements: net income from the income statement is added to the beginning retained earnings to help identify the ending retained earnings. Once the ending retained earnings are calculated it is then added on to the balance sheet. The ending amount of cash on the balance sheet must match the ending amount of cash on the statement of cash flows.
In order to get a full understanding of the financial standing of a company, a company must use the financial statements. One cannot get all the answers from one financial statement, all must be reviewed. This is why the interaction of the statements is key. How Changing One Affects the Others As stated above, the financial statements are tied together. If one statement is changed, it affects all the other ones. For example, let’s say a company reports net income of $2,550 on their income statement after adding revenues and subtracting expense.
This is also reported on the etained earnings statement but if reported incorrectly it would cause the balance sheet to be off as well due to this being reported under stockholder’s equity. If these numbers are not correct, then the ending amount of cash does not match the amount of cash on the statement of cash flows. This goes to show that one incorrect amount on just one statement will affect the others. Why it's Essential to Understand the Relationship between the Statements Organizations keep financial statements for several reasons but, one reason is to tell a story of the business’s financial standings.Business managers and investors have to know what is on the company financial reports in order to track business trends.
The numbers between each of the statements can predict trends currently taking place in the organization, which may have an impact on its profitability. Investors need to understand financial statements because the information they contain will give a better understanding of how successful the company is or has the potential to be. If the company is not in good standings, then the investor will be cautious before investing monies into the business (Knol, 2009). ConclusionEach four financial statements are inter-related and have significant roles to illustrate key components of a business’s financial condition. Understanding how each financial statement functions with one another can help managers with their decision making processes; and it can propel managers to leading their businesses into the right direction. References Kimmel, P.
D. , Weygandt, J. J. , ; Kieso, D. E.
(2009). Accounting: Tools for business decision making (3rd ed. ). Hoboken, NJ: John Wiley ; Sons.
Knol. (2009). Retrieved from http://knol. google. com/k/accounting-principles-income-statement- balance-sheet#
