Financial Statements in This Text,

¶ … 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.

3. The Balance Sheet

The balance sheet can in basic terms be described as a "financial statement that summarizes the assets, liabilities, and owner's equity of a company" (Porter and Norton, 2010). The balance sheet is regarded a rather important financial statement largely because it helps in the determination of not only what an entity owns but also what it owes. Balance sheet items can also be used by investors to determine the financial health of a given company. This can be done through the analysis of the relevant financial ratios including but not limited to liquidity ratios.

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