The logical order of preparing the four main financial statements

¶ … Financial Statements

In this text, I discuss the order followed in the preparation of financial statements. In addition to identifying the order of preparation, I also comment on the logic behind the same. In so doing, I will concern myself with four financial statements. These are the Income Statement, Statement of Owner's Equity, the Balance Sheet and finally, the Cash Flow Statement.

The relevance of financial statements cannot be overstated when it comes to the communication of information regarding a given entity's performance as well as financial health. Thus businesses typically prepare financial statements so as to facilitate the communication of vital financial information to the intended users of such information. Users in this case include but they are not limited to shareholders, the government, creditors etc. On preparation of the adjusted trial balance, businesses undertake to prepare the other main financial statements while adhering to the logical order highlighted below.

1. Income Statement

The income statement according to Porter and Norton (2010) "summarizes revenues and expenses." Typically, this statement is prepared first based on the impact it has on the other financial statements. For instance, this statement facilitates the computation of the net income or loss figure which is utilized in the preparation of the statement of owner's equity.

2. The Statement of Owner's Equity

In the opinion of Cunningham et al. (2011), "the statement of changes in owner's equity summarizes the transactions that affected owner's equity during the accounting period." Information contained in this statement is utilized in the preparation of some sections of the balance sheet i.e. The stockholder's equity section.

4. The Cash Flow Statement

Of the financial statements discussed in this text, the cash flow statement is typically the last financial statement prepared. A cash flow statement in the opinion of Cunningham et al. (2011) "shows the changes in a business' cash during an accounting period by listing the cash inflows and outflows from its operating, investing and financing activities..."

Reasons for Preparing the Financial Statements in the Order Above

One of the main reasons why financial statements have to be prepared in a prescribed logical order has got to do with the need to transfer some pieces of information from one financial statement into the next. In this case, entries in one financial statement may be utilized in seeking to explain entries in another financial statement. Thus in basic terms, the financial statements prepared by entities tend to be largely interrelated and in such a case, their preparation typically follows a logical order.

Conclusion

Based on the discussion above, it is clear that of the four financial statements highlighted, none can be said to be independent. Instead, they are all interrelated and in such a case, they could be relied upon to give a story of the financial events that affect a given entity within a specified period of time.