Question

What are four major financial statements?

What are the similarities among these statements?

What are the differences among these statements?

What order should they be prepared?

Answer 1

The four major financial statements are (1) Income statement (2) Balance Sheet (3) Cash flow statements (4) Statement of retained earnings.

The statements are similar as they all effect and show the financial position and performance of the entity. For example, cash flow shows the cash inflows and outflows which in turn effects the final cash balance shown in the balance sheet.

They are all prepared keeping in mind that a true and fair view regarding the entity is to be provided to the users of the financial statements.

The differences include the fact that cash flow, income statement and retained earnings are prepared over a given period whereas balance sheet is prepared on a particular date.

They also serve different purpose as income statement shows financial performance of an entity whereas cash flow statement shows cash inflows and outflows, balance sheet shows the financial position and retained earnings shows shareholder's equity.

The order of preparation is (1) Income statement (2) Balance Sheet (3) Cash flow statements (4) Statement of retained earnings.