Question

Pretend you are building a house using a balance sheet, an income statement, and a cash flow statement. Which of these financial statements would you consider the foundation of the house? Which statement would be the walls? Which would be the roof, the doors, or the windows, etc.? Justify your decision for the assigning the financial statements to the various parts of the house. You can include other parts of the house as long as you explain why a particular financial statement serves the same purpose as that component of the house.

Answer 1

This question is quite subjective and every expert might have its own opinion on this.

My opinion is below:-

We have to divide the All of the three statements into 2 parts each to imagine such a thing because each of the statement is showing both positive and negative sides of the business.

1) Balance sheet - Assets and Liabilities

2) Income statement - Income and Expenses

3) Cashflow statement - Cash outflows and Cash Inflows

Whenever we think of any organisation as a whole the whole boundary of that organisation i.e as on date position is stated by "Balance Sheet". Balance sheet always shows the position of the company "Week" or "Strong".

Therefore in the same way boundary of house is consisted of Walls, Roof and Foundation. If Walls and foundation and roof of the house if they are strong then the house will never fall this are the most important "asset" side of the balance sheet. The existence of the house will be dependent on this boundary of the house. "Week" boundary will be liability for the house.

Then there are other thing within the house kept for use of the people living in the house like Furniture, TV, Electrical fittings, ETC will also form the "Asset" Side of the Balance sheet.

There should be a source or a way of generation of revenue/Cash inflows and expenses/ cash outflows for the house. The way for the house can be compared with Windows and Doors. This are the ways to come in and go out. Income statement in the organisation gives the picture of how much has come in as income and how much has gone out as expenses (as per accrual concept) and same of cashflow statement for in and out of cashflow from organisation.