Question

1. What is the income statement in accounting? Please show the basic structure of Income statement.

2. What is the balance sheet? How is it linked to the income statement? Show an example.

3. What is the cash flow statement? How is it linked to the balance sheet? Show an example.

Answer 1

An income statement shows the financial performance of an entity over a given period.

It's structure is as follows:-

Sales                                xxx

Less:Variable cost             (xxx)

Contribution                       xxx

Less:Fixed cost                 (xxx)

Earnings before int and tax xxx

Less:interest                      (xxx)

Earnings before tax             xxx

Less:Tax                           (xxx)

Earnings after tax                xxx

BALANCE SHEET

It shows the financial position of an entity of a particular date. It comprises of assets and liabilities.

It is related to income statement as the financial performance for a particular period is bound to effext the financial position.

Example- Depreciation charged on machine is shown in income statement as an expense of using the asset but this also leads to a reduction in value of asset shown in Balance sheet.

CASH FLOW

It shows the amount of cash that has flown in and flown out of the business in a given period. It is linked to balance sheet as cash is a current asset and is reflected in the balance sheet.

Example- Cash inflow is shown as an addition in cash flow statement but is also increases the value of assets in the balance sheet.