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Financial Statements: Balance Sheet, Income, and Cash Flow

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Illustrate the process for moving from transactions to the development of the income statement.

The relationship between the balance sheet and the statement of cash flows. In what sense is the statement of cash flows a derivative statement of the balance sheet?

The linkages between the income statement and the balance sheet.

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The solution illustrates the process for moving from transactions to the development of the income statement. The relationship between the balance sheet and the statement of cash flows is given. An analysis of the linkage between the income statement and the balance sheet is given.

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Illustrate the process for moving from transactions to the development of the income statement.

Following is the process for moving transactions to the income statement:

1. The transaction should be identified example, purchase, sales, rental expense
2. The source document with respect to each transaction should be identified to support the transactions
3. The accounts which should be debited or credited should be decided.
4. The journal entry should be passed for each transaction in journal depending upon the type example: purchase journal, sales journal, general ledger, cash receipts/disbursement journal. All the entries in the journal must be made in chronological order.
5. All entries in the journal should be posted in ledger account to arrive at the balances.
6. Then trial balance should be prepared to see whether total of debit balances of various accounts equal the total of the credit balances of other accounts.
7. Then any difference should be identified and mistakes should be corrected.
8. Adjusting entries should be prepared with respect to accruals and deferrals.
9. Adjusting entries should be posted in the ledger accounts.
10. Adjusted trial balance should be prepared incorporating the adjusting entries.
11. Then income statement should be prepared incorporating the ...

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