Financial Accounting
Preparing Financial Statements
5 question(s)
What are the main financial statements?
Beginner
The income statement (profit or loss), the balance sheet (statement of financial position), the statement of cash flows, and the statement of changes in equity, plus notes.
P&L, Balance Sheet, Cash Flow, Changes in Equity
Real-world example
Investors read all four together to judge performance and position.
What does the income statement show?
Beginner
Financial performance over a period: revenue less expenses equals profit or loss.
Revenue 100,000 - Expenses 78,000 = Profit 22,000
Real-world example
Shows whether the business was profitable this year.
What does the balance sheet show?
Intermediate
The financial position at a point in time: assets, liabilities and equity, with assets equal to liabilities plus equity.
Assets 250,000 = Liabilities 90,000 + Equity 160,000
Real-world example
A snapshot lenders use to assess solvency and gearing.
How do the financial statements link together?
Advanced
Profit from the income statement flows into retained earnings (equity) on the balance sheet; the cash flow statement reconciles profit to the movement in cash between two balance sheets.
Net profit -> Retained Earnings; Cash flow -> change in Cash
Real-world example
A model must keep the three statements interconnected and balanced.
In what order are the financial statements prepared?
Intermediate
Usually the income statement first (to get profit), then the statement of changes in equity, then the balance sheet, then the cash flow statement.
P&L -> Equity -> Balance Sheet -> Cash Flow
Real-world example
Profit is needed before equity and the balance sheet can be completed.