Understanding the Link Between Financial Statements: A Rule of Thumb Approach
Dear BIVILLEPM Community,
I’m working on a Strategic Plan and have used AI to generate templates for each part. This was completed in two days, but customization and integration, particularly with financial projections, remain challenging.
Accountants excel in C-level positions because “accounting is the language of business.” In strategic planning, our analysis must align with the numbers for consistency.
Sequence of Development
1. Income Statement:
- First Step: Prepare the income statement.
- Why First: Determines net income or loss needed for other financial statements.
- Development: Compile revenue, expenses, and taxes.
2. Statement of Retained Earnings (if separate):
- Second Step: Prepare the statement of retained earnings.
- Why Second: Shows changes in retained earnings using net income.
- Development: Adjust for net income and dividends.
3. Balance Sheet:
- Third Step: Prepare the balance sheet.
- Why Third: Requires the retained earnings figure.
- Development: List assets, liabilities, and equity.
4. Cash Flow Statement:
- Fourth Step: Prepare the cash flow statement.
- Why Fourth: Uses information from the income statement and balance sheet.
- Development: Categorize cash flows into operating, investing, and financing activities.
Link Between Financial Statements
1. Income Statement:
- Purpose: Shows revenues, expenses, and profits.
- Link to Balance Sheet:
- Net income increases retained earnings.
- Expenses and revenues impact assets and liabilities.
- Link to Cash Flow Statement:
- Net income is adjusted for non-cash items.
2. Balance Sheet:
- Purpose: Snapshot of financial position.
- Link to Income Statement:
- Asset and liability changes reflect income statement transactions.
- Equity changes with net income and dividends.
- Link to Cash Flow Statement:
- Changes in balance sheet accounts reconcile net income to net cash.
- Long-term asset and liability changes reflect investing and financing activities.
3. Cash Flow Statement:
- Purpose: Shows cash inflows and outflows.
- Link to Income Statement:
- Adjusts net income for non-cash items and working capital changes.
- Link to Balance Sheet:
- Reflects cash effects of asset, liability, and equity changes.
Example Connection in a Nigerian Context:
- Income Statement: Reports ₦50 million in net income.
- Balance Sheet:
- Retained earnings increase by ₦50 million.
- Accounts receivable might increase with credit sales.
- Depreciation reduces asset book value.
- Cash Flow Statement:
- Starts with ₦50 million net income.
- Adjusts for non-cash expenses and working capital changes.
These statements provide a comprehensive view of a company’s financial health, essential for the Nigerian business environment by #GeorgeNWOGU with GPTAI
#FinancialStatements #IncomeStatement #BalanceSheet #CashFlowStatement #FinancialAnalysis #Accounting #BusinessFinance #Nigeria #ProjectManager #COO #GeorgeNWOGU #BIZVILLEPM 🌐🚀
George NWOGU is a Senior Project & Planning Manager, COO and Global Trainer from Nigeria. He is the Founder of Bizville Project Management Limited
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