Question

The Income Statement, Balance Sheet and Statement of Cash Flows are integral elements when examining the strength or weakness of an organization. How would you explain the correlation between these statements and what specific areas would you focus on when making an assessment of a company?

Answer 1

Financial statements comprises of income statement balance sheet cash flow statement these three are interrelated in several ways

1. purchase sale or disposal of assets appears on both balance sheet ( as asset reduction ) and income statement ( as a gain or loss as the case may be )

2. The net income balancing figure in income statement is added to the retained earnings item in the balance sheet which alters the amount of equity exists in the balance sheet

3. The closing cash balance in balance sheet also appears in the statement of cash flow

Financial statements are highly interrelated with each other

The following areas are to be considered when making a assessment of a company

Trends in cash flow ( positive/negative )

Level of stock turnover

Debtors collection period

Trends in sales turnover ratio

Thank you hope this helpfull