Question

You have learned how the four principle financial statements of a company are intrinsically linked today. Explain how this linkage occurs

Answer 1

Four principal financial statements of a company:

The set of four principal financial statements of a company includes the following statements:

1. Income Statement,
2. Balance Sheet,
3. Statement of Shareholder’s Equity, and
4. Statement of Cash Flows

All these financial statements are intrinsically linked. The linkage can be explained as follows:

Income Statement is prepared to calculate the net income earned from the business, the net income is then added with the Stockholder’s equity in the Statement of Shareholder’s Equity. The Ending balance of Stockholder’s equity is then transferred to the balance sheet under the Equity section. All the cash movements in all other three statements (Income statement, Balance sheet and Statement of Shareholder’s Equity) are reflected in the statement of Cash Flows.