•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 the financial statements?
The financial statements of an entity consist of:
- Statement of Financial position
- Statement of comprehensive income
- Statement of changes in equity; and
- Statement of Cash Flows
In order to understand their reaction with each other, you have to look at the balance sheet equation analysis. Refer to the Framework for the Preparation and Presentation of Financial Statements issued by the International Accounting Standards Board. The need to understand the relationship is related to the objectives for the preparation of financial statements. I would like to provide a little bit information about accounting. It is not easy to provide a concise definition of accounting since the word has a broad application within business and applications. The American Accounting Association defines accounting as follows: ‘The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. There are two main purposes of financial statements:
1. To report on the financial position of an entity
2. To show how the entity has performed over a particularly period of time. The most common measurement of performance is profit.
It is important to understand that financial statements can be historical or relate to the future. The purpose of financial accounting statements is mainly to show the financial position of a business at a particular point in time and to show how that business has performed over a specific period. The three main financial accounting statements that help achieve this aim are: (1) The profit and loss account for the reporting period
(2) A balance sheet for...