“Accounting consists of three basic activities: identifying, recording and communicating economic events of an organization to those interested in learning more about the organization. Once relevant economic events are selected, an organization records the events by keeping a systematic, chronological diary of events to provide a history of its activities. Finally, the collected information is communicated by means of accounting reports, such as financial statements” (Kimmel, Weygandt, & Kieso, 2008).
There are many accounting reports that accountants can compile, but the four most commonly used reports are the income statement, the retained earnings statement, the balance sheet, and the statement of cash flows.
The four financial statements are interrelated and are prepared in the following sequence:
The income statement is prepared first. The net income from this report is needed to determine the ending balance in the retained earnings report. The retained earnings statement is prepared next, adding the net income from the current period to the previous retained earnings, and after deducting dividends, the ending balance in retained earnings is then used in the balance sheet. The balance sheet is prepared next, and the cash shown in the balance sheet is needed to prepare the cash flow statement. Finally, the cash flow statement is prepared, showing where money came from during the period and how was it used (Kimmel, Weygandt, & Kieso, 2008).
These reports are useful to various stakeholders, such as owners, managers, investors, lenders and so on because they all show important aspects of a business.
Income Statement... [continues]
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