This section explores how the statement of financial position (balance sheet), income statement, and statement of cash flows are interconnected and together provide a comprehensive view of a company’s financial health.
The three primary financial statements—the balance sheet, income statement, and statement of cash flows—are based on the same underlying transactions but present different perspectives on the company’s financial activities. These statements are not alternatives to each other; rather, they complement each other, offering different "views" of the company’s financial position and performance.
The financial statements "articulate," meaning they are closely related. For example, the net income from the income statement affects the retained earnings in the balance sheet, while changes in cash from the statement of cash flows explain the changes in the cash balance reported on the balance sheet. Understanding the relationships between these statements is crucial for assessing the company’s overall financial status and making informed decisions.
The balance sheet provides a snapshot of the company’s financial position at a specific point in time, while the income statement and statement of cash flows cover the intervening period between two balance sheets. This allows users to see how the company’s financial position changes over time due to its operations and cash flow activities.