Question

The financial statements must be prepared in a specific order. What is that order and why do financial statements need to be prepared in that order?

Answer 1

It is impossible to produce a retained earning statement without net income, a balance sheet without the ending retained earnings balance, and a cash flow statement without using an income statement and a balance sheet.

Balance sheet:

• A balance sheet gives you a brief snapshot of the financial state of your business at any particular time. Business leaders can examine the financial health of their company using a balance sheet, an income statement, and a cash flow statement.

In this order, financial statements are created:

1. Income Statement

2. Statement of Retained Earnings

3. Balance Sheet

4. The Statement of Cash Flows

• The financial statements should be written in that order since it is impossible to prepare later statements without having prepared earlier statements. For instance, it is impossible to produce a retained earning statement without net income, a balance sheet without the ending retained earnings balance, and a cash flow statement without using an income statement and a balance sheet.

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