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.
Learn to prepare and analyze the four main financial statements: income statement, balance sheet, statement of retained earnings, and statement of cash flows.
Key Concepts
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.
Related Resources
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.
Net income from the income statement flows into the statement of retained earnings. Ending retained earnings flows to the equity section of the balance sheet. The ending cash balance on the cash flow statement matches the cash balance on the balance sheet. Each statement depends on the one before it.