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Understanding the Relationships between Financial Statements

In what ways do the elements of the four financial statements interact with one another?

How might changing one of the financial statements affect the other financial statements?

Why is it essential to understand the relationship between financial statements?

Solution Preview

The four financial statements flow together to give a complete picture of the financial health of an organization. There are three types of permanent (real) accounts; Assets, Liabilities and Equity. There are also three major types of nominal accounts; Revenue, Cost-of-Sales and Expense. (Cost of sales is an expense, but a specific category of expense).

At the end of a fiscal period (typically 1 year) the nominal accounts close into an equity account, called Retained Earnings. Then the nominal accounts are resent to zero and the results of the previous period are moved to the Balance Sheet to become part of the real accounts. (Equity).

Changes in the Income Statement (which is the report that lists the nominal transactions over a specified period of time) affect the Balance Sheet ...

Solution Summary

This solution discusses how the financial statements fit together in approximately 500 words.

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