Financial Statements
Financial statement refers to a company’s activities over a specific period and plays a significant role in the operation of a business. The information provided is useful to present and potential investors, creditors, and other users in making investment, credit, and similar decisions (Crooch, 2006).
The first basic interrelationship that exists between the income statement, retained earnings statement, balance sheet, and cash flow statement is that these financial reports need to be prepared in an appropriate sequence, since information derived from one-statement flows into the other.
The income statement is a statement of the profit or the loss of an organization derived from the operations of the business. Revenues resulting from various business transactions such as the sales of products or services to customers begin the statement. Next listed are the expenses resulting from the costs associated with the everyday operations of the company. Finally, the difference between the revenues and expenses results in the net income or net loss. For example, in the income statement, the net profit for the month or year is determined as shown in Figure 1.
Figure 1. Principles of Accounting, 2007
The importance of this statement provides the user with data on the profitability of the company. Additionally, the income statement shows the costs and expenses associated with earning the revenue (Beginners Guide to Financial Statement, 2007).
The operating profit or loss then flows into the Retained Earnings S ...