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General Accounting Discussions: Types of Financial Statements

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  1.  
    • CommentAuthorLiz
    • CommentTimeMay 16th 2008 edited
     
    I have learned that there are 4 types of financial statements, which are: Income statement, retained earnings statement, balance sheet & cash flows statement. Further, they are prepared in that specific order but WHY?
    It must have something to do with how the figures balance out at the end. Can anyone provide me with a detailed explanation of why these statements are prepared in this order please? Thanks in advance.
  2.  
    I sure would like to know the same thing Liz has asked. Anyone? Anyone? Please.
    • CommentAuthorCounter
    • CommentTimeMay 22nd 2008
     
    Perhaps the reason is that the net income from the income statement is needed so that it can be added to the retained earnings balance. The ending retained earnings balance can then be included in the balance sheet. (The balance sheet will only balance if the current period's net income is included in the retained earning balance.) The completed income statement and balance sheet can then be used to prepare the statement of cash flows.
  4.  
    Actually if you are using accounting software, the procedural order is unimportant. Your simply enter business transactions: purchases, receipts etc, and run reports in any order that give the appropriate figures for the period or date that you want. The only procedural events are 'End of Period' closeout, typically at year-end only, when income and expense ledgers are cleared and their sums transferred to equity, in preparation for beginning to enter the following year's transactions.
    • CommentAuthorLiz
    • CommentTimeSep 2nd 2008
     
    1) Income Statement
    2) Retained Earnings Statement
    3) Balance Sheet
    4) Statement of Cash Flows

    This is the order in which they are prepared.

    They are prepared in this order because there are pieces of information that needs to be carried over into the next statement.

    I had to answer my own question.....
    • CommentAuthorGie
    • CommentTimeSep 3rd 2008 edited
     
    Actually, the last thing you have to prepare is the Balance Sheet. You start with Income Statement (P&L) and next is the Cash Flow Statement. The Statement of Changes in Financial Position or the so-called Cash Flow Statement determines the amount of cash in you Balance Sheet. Thus, you cannot come up with your Balance Sheet ahead of the Cash Flow Statement. The Retained Earnings can be presented in a separate report but can also be presented in the Balance Sheet.
    • CommentAuthorLiz
    • CommentTimeSep 3rd 2008
     
    I see. Thank You very much. =)
    • CommentAuthorCounter
    • CommentTimeSep 4th 2008
     
    I disagree with Gie.

    The Cash shown on the balance sheet comes from the general ledger Cash account after the Cash account balance has been reconciled with the bank statements.

    The statement of cash flows explains the change in the Cash balance from a previous balance sheet to the Cash balance on a recent balance sheet. For example, the change in Cash from the Dec 31, 2006 balance sheet to the Dec. 31, 2007 balance sheet is explained on the 2007 statement of cash flows.

    So, I say that Liz had the correct order.
    Thankful People: Liz
    • CommentAuthorLiz
    • CommentTimeSep 4th 2008
     
    My accounting book did list them in this order -however I am open to really understanding why they are in this order.

    I feel I "sort" of understand why but I do not feel 100% solid on why this order is important. =) Still learning.

    Thank You all for your assistance on this one.

    Liz
    • CommentAuthorprasanthi
    • CommentTimeSep 10th 2008
     
    Liza,
    Income statement is prepared first to obtain the retained earnings which should be transferred to Retained Earnings Statement and the total in the retained earnings statement is transferred to Owner's( Shareholder's) Equity in Balance Sheet.So they are prepared in this order. But first time I am hearing ther is such order in financial satements . Thankyou.
    • CommentAuthorprasanthi
    • CommentTimeSep 10th 2008
     
    Sorry in my previous comment I forgot to include cashflow satement, Cash flow statements are prepared from balance sheet of current year and previous year. So the financial statement should be prepared in this order.

    Thankyou.
  12.  
    This tutorial provides a comprehensive look at the relationship between the four financial statements through a very simple example...

    http://vitalbusinessinfo.blogspot.com/2009/10/relationship-between-financial.html

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