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The financial statemets

Posted on: August 12, 2008

The financial statements

  1. The income statement is the first one to be made in the end of a business period. It illustrates the income which can be net income or net loss, obtained during the period. We calculate the net income/loss by subtracting the expenses from the revenues.
  2. The retained earnings are the profits made during the period. That is net income less dividends, because dividends (cash benefits distributed to the shareholders) are shared out to the owners. Now we have the retained earnings statement, which shows the profits produced during the period.
  3. The balance sheet measures the value of the business during its operational period. According to the accounting equation, the amount of assets must be equal to the amount of liabilities plus owner´s equity (stockholder´s equity).
  4. The statement of cash flow summarizes the inputs and outputs of cash spent during the period financing, operating or investing.

These three statements are generated in the written order (1-2-3-4), because each one is linked to the others. For instance, the retained earnings statement needs the net income/loss of the period which is summarized in the income statement. The balance sheet needs both statements to be displayed correctly.

source: my notes and “financial accounting by horgren and harrison 6th edition”.


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