Question

1. Identify the 3 main financial statements? (3) Discuss the purpose of each statement? (3) Explain how income statement is linked to the balance sheet? (4)

Answer 1

Answer 1 :

Three main financial statements are :

1. Income statement

2. Balance sheet

3. Cash flow statement.

Purpose of each statement :

• Income statement :

Income statement reflects the financial position of the company profits, expenses revenue and losses are recorded in this statement. It helps the investor to take decision whether they should invest in a particular company or not. Net income of one year is shown in this statement.  

It also helps to determine profitability ratios.

• Balance Sheet :

Balance Sheet of a company shows the total amount of assets and liabilities of a company. It helps to determine the company is a leveraged firm or unleveraged form during financial statement analysis. Various ratios like current ratio turnover ratio and solving ratio, on the basis of these ratios an investor can decide whether he should at this company in his portfolio or not.

• Cash Flow statement :

Cash flow statement shows net cash amount available with the company. It is prepared to know the liquidity position of the company. It helps to bifurcate cash amount according to each activity. It gives a clear picture of cash amount where it has been invested and help to make plan for future investments.

Income Statement is linked to the Balance sheet :

Income Statement and Balance sheet are linked to each other because during financial statement analysis various ratios are required to calculate so that an analyst be able to understand the financial position of the company.

For example :

Turnover asset management ratio = Net income / Total Assets

To calculate this ratio we need both the statement. So income statement and balance sheet both are necessary statement to analyse the great financial position of the company.

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