4.3: Relationships Between Financial Statements
Learning Outcomes
- Analyze the relationships between key financial statements
Income Statement
The Income Statement is also called the Earning Statement or the Profit and Loss Statement, sometimes shortened to the P&L, but no matter what it is called, net income or loss is always the bottom line. This bottom line flows to the next statement, the Statement of Owners’ Equity. That is why it is the first statement to be compiled from the adjusted trial balance.
Statement of Owners’ Equity
The Statement of Owners’ Equity reconciles beginning capital to ending capital. Remember that the Balance Sheet shows that assets are equal to liabilities plus equity. Ending capital and equity are synonymous, so the bottom line from the Statement of Owners’ Equity, ending capital, flows to the next statement—the Balance Sheet.
Balance Sheet
Net income from the Income Statement flows to the Statement of Owners’ Equity, and the ending capital balance flows from the Statement of Owners’ Equity to the Balance Sheet.
Statement of Cash Flow
Finally, the statement of cash flows reconciles beginning cash and cash equivalents from the balance sheet (ending cash from the prior set of financial statements) to ending cash from the current balance sheet, effectively reconciling accrual basis accounting to cash basis.
Practice questions