How to adjust balance sheet line items for retained earnings?
Hi everyone:
I was just reviewing WSP technical question bank, and came across the following. The guide just says generally that balance sheet adjustments are made to offset retained earnings - would anyone happen to know what are the specific offsetting changes/where I can find them please?
Thanks
Q. How are the 3 financial statements connected?
The financial statements are very interconnected, both directly and indirectly.
The income statement is directly connected to the balance sheet through retained earnings. Specifically, net income (the bottom line in the income statement) flows through retained earnings as an increase each period less dividends issued during the period.
The offsetting balance sheet adjustments to the increase in retained earnings impacts a variety of line items on the balance sheet, including cash, working capital and fixed assets.
The cash flow statement is connected to the income statement through net income as well, which is the starting line of the cash flow statement.
Lastly, the cash flow statement is connected to the balance sheet because the cash impact of changes in balance sheet line items like working capital, PP&E (through capex), debt, equity and treasury stock are all reflected in the cash flow statement. In addition, the final calculation in the cash flow statement - net change in cash - is directly connected to balance sheet, as it grows the beginning of the period cash balance to arrive at the end of period cash balance on the balance sheet.
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