How to Read a Financial Report, 10th Edition

6FITTING TOGETHER FINANCIAL STATEMENTS

Chapters 3, 4, and 5 introduce the income statement, balance sheet, and the statement of cash flows for our example business, as you would see these three primary financial statements in a financial report. Each statement stands alone, by itself, on a separate page in the financial report. Each statement is presented like a tub standing on its own feet. The connections between the three financial statements are not made explicit. There is no clear trail of the crossover effects between the three financial statements. But, in fact, there are dual effects—specifically, what happens in one financial statement also happens in another financial statement.

In this chapter I explain how the financial statements interrelate at a summary level, which I then drill further into in the rest of Part Two. This part is structured to follow a balance sheet and income statement from top to bottom, as follows:

• First, I focus primarily on connections between sales revenue and expenses (from the income statement) and the asset section of the balance sheet (Chapters 7 through 10).
• Second, I turn our attention to the connections between expenses and the liability section of the balance sheet (Chapters 11 through 14).
• Finally, I close out our discussion on financial statement connections with two chapters dedicated to reconciling cash, the income statement, and the balance sheet, starting with the stockholders’ equity section of the balance sheet (Chapter 15 ...