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How the 3 Financial Statements Relate

The balance sheet equation is one of the most important relations in accounting. In figure 1.1, we expand the Assets and the Owners’ Equity accounts in this equation to separately identify the Cash account and the Retained Earnings account. We do so to help demonstrate the relation between the balance sheet, the income statement, and the cash flow statement. The balance sheet equation has to hold at the beginning of the period (the top of the figure) and the end of the period (the bottom of the figure). How do the two balance sheets relate to each other? One way is through the income statement. In particular, the income sta...


Cover of Financial Literacy for Managers: Finance and Accounting for Better Decision-Making


The balance sheet, income statement, and cash flow statement provide different information, but they must be viewed together to get a complete picture of the financial health of an organization or team. Learn how the three statements are interrelated.