Question

List and discuss the purpose of each financial statement, the order in which the financial statements are prepared, and the information included in each financial statement.

Answer 1

Financial Statements:

The balance sheet , an income statement, a statement of cash flows, and statement of retained earnings will make up the financial statements.

Income Statement:

An income statement is one which shows a summary of income and expenses for a particular accounting period. It presents the income or loss which is calculated by subtracting Total Expenses from Total Revenue earned for that period. It also discloses the earnings per share.

Balance Sheet:

The balance sheet presents the financial position of the company at a given point. A balance sheet presents the assets, liabilities and shareholders’ equity of a particular organization on a given point of time.

Statement of Retained Earnings:

Retained earnings are cumulative profits of a company after subtracting dividends declared. Therefore, all year’s profits that have not been distributed will add to this fund and similarly if the company gets a loss then it will be deducted from this amount.

Cash Flow Statement

It provides information about the cash inflows and cash outflows of the business entity under the three heads which is - operating, investing and financing activities.

The order in which it is made is: Income Statement, Statement of Retained Earnings, Balance Sheet, and Cash Flow Statement. The cash flow statement is made after the balance sheet has been prepared.