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The Income Statement Affectsthe Balance Sheet

So far we have been considering the balance sheet by itself. But here’s one of the best-kept secrets in the world of financial statements: a change in one statement nearly always has an impact on the other statements. So when you’re managing the income statement, you’re also having an effect on the balance sheet.

THE EFFECT OF PROFIT ON EQUITY

To see the relationship between profit, from the income statement, and equity, which appears on the balance sheet, we’ll look at a couple of examples. Here’s a highly simplified balance sheet for a brand-new (and very small!) company:

Assets
Cash

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