Financial Accounting: In an Economic Context

RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS

Figure 2-7 presents a general overview of the four basic financial accounting statements for Harbour Island Company and shows how they relate to one another. Take some time to study it.

Note the four statements indicated by the numbers: (1) balance sheet, (2) income statement, (3) statement of shareholders' equity, and (4) statement of cash flows. Note also that an additional balance sheet, prepared at the end of the period, is included on the right side of the figure. The account balances on this balance sheet are different from those on the balance sheet on the left. To explain how the balance sheet accounts changed during the year, examine the other three financial statements: the statement of cash flows, the statement of shareholders' equity, and the income statement.

The statement of cash flows explains the activity during the year in the company's cash account. At the beginning of 2011 the balance in the cash account was $100. During the year, operating, investing, and financing transactions affected the cash balance, and the end result was $220. The statement of cash flows ties into the cash accounts listed on the balance sheet at the beginning and end of 2011.

The statement of shareholders' equity, like the statement of cash flows, also explains the activity in balance sheet accounts during 2011 —contributed capital and retained earnings, which appear in the shareholders' equity section of each balance sheet. The beginning and ...