Financial Statements
Learn to prepare and analyze the four main financial statements: income statement, balance sheet, statement of retained earnings, and statement of cash flows.
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Study Tips
- ✓Prepare statements in order: income statement, retained earnings, balance sheet, cash flows
- ✓Net income flows from income statement to retained earnings
- ✓Ending retained earnings flows to the balance sheet
- ✓Memorize the accounting equation: Assets = Liabilities + Equity
Common Mistakes to Avoid
Common errors include forgetting to close net income to retained earnings, mixing up the statement order, and not properly classifying current vs. long-term items. Always prepare statements in the correct order since they build on each other.
Financial Statements FAQs
Common questions about financial statements
Prepare them in this order: (1) Income Statement, (2) Statement of Retained Earnings, (3) Balance Sheet, (4) Statement of Cash Flows. Each statement uses information from the previous one.
A single-step income statement groups all revenues together and all expenses together, with one subtraction to get net income. A multi-step income statement shows gross profit, operating income, and net income separately.
The balance sheet must always balance: Assets = Liabilities + Stockholders' Equity. This equation represents the company's financial position at a specific point in time.
Related Topics
All Accounting Topics
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