Balance Sheet, Income Statement, Cash Flows

Balance Sheet, Income Statement, Cash Flows

According to Michael Dennis in his book: “Credit and Collection Handbook” there is an important interrelationship between the Balance Sheet, Income Statement and Statement of Cash Flows. The income statement reports revenues, expenses and the resulting net income or loss for a period of time. The Balance Sheet reports a company’s assets, liabilities, and equity as of a specific date in time. The Statement of Cash Flows reports cash inflows and outflows from operating activities, investing activities and financing activities and the resulting net increase or decrease in cash and cash equivalents.

The three statements are interrelated. From the Income Statement net income after tax minus dividends paid results in and increase, or if there is a net loss a decrease in the amount of equity reported in the equity section of the Balance Sheet under the account retained earnings. The Statement of Cash Flows combines elements from the Income Statement and the Balance Sheet to create a report showing the cash inflows and outflows on a cash basis rather than the more commonly used accrual basis. The premise behind the accrual basis is that revenues are recognized when they are substantially earned and expenses are recorded when the obligation is recognized irrespective of when the cash is actually received or spent. Thus, each of these statements is interrelated. The Balance Sheet could not be completed without information from the Income Statement, and the Statement of Cash Flows requires data from both the Balance Sheet and Income Statement to complete.

Dennis, Michael. Credit and Collection Handbook. Paramus, NJ.



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