What is the Relationship Between Financial Statements?

Relationship Between Financial Statements

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Relationship Between Financial Statements

Financial statements are interrelated and provide a comprehensive view of a company’s financial health. The primary financial statements are the Income Statement (or Profit and Loss Statement), Balance Sheet (or Statement of Financial Position), Statement of Cash Flows, and the Statement of Changes in Equity. Let’s explore their relationship:

All these statements provide different angles of a company’s financial health. For instance:

To get a comprehensive understanding of a company’s financial situation, these statements should be reviewed collectively. They are all derived from the same accounting data and are just different representations of it. By understanding the relationship and flow between these statements, users can piece together a more complete and cohesive picture of a company’s financial performance and position.

Example of the Relationship Between Financial Statements

Let’s illustrate the relationship between the financial statements with a simple example.

Imagine a company named TechGuru Ltd. Here are some key financial activities during its first year of operations:

Relationships Illustrated:

This example showcases how financial events and figures from one statement connect to and influence the other statements, painting a comprehensive picture of TechGuru Ltd.’s financial position and performance.

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