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

The foundation of the House should be strong and so as the balance sheet of any entity.

Roofs, doors or windows give way for coming in and going out. Same does the cashflow which measures cash inflows and outflows.

Walls should be stable and consistent just like income statement. Any major changes can collapse the house as it requires maintenance and all etc.

Sumamary:

Balance Sheet: Foundation of House

Income Statement: Walls of the House

Roofs, doors or windows: Cashflow statement