Relationship between the different financial statements
Hi All, just prepping for an interview, trying to review the relationship between the different statements. Let me know if this is right, or please add anything i'm missing. Thanks.
-Net income increases the Retained Earnings statement. Net losses and dividend payments decrease Retained Earnings statement.
RE then similarly affects the SE portion of the balance sheet,
statement of cash flows affect the cash portion of the assets in the balance sheet with investing cash, affects the L+SE portion of balance sheet with financing cash, and income statement with operating cash.
Anything else I am missing? Thanks!
-debt is on the balance sheet and the interest expense flows through the income statement, tax-affected
-depreciation effect is commonly asked - increases accumulated depreciation on BS then becomes depreciation expense on the income statement, reducing NI by a tax-affected amount
could be missing some probably.
If you really want to go there, you'll also have other similar "accrued" categories like depreciation - taxes, certain expenses, etc
I don't think that answer is usually expected - the content of you first post is usually plenty. This question is usually a "check the box". If you nail the main points with confidence, they will likely not press you for further detail.
3 Statements: Income Statement(IS) Cash Flow Statement(CF Statement) Balance Sheet(BS)
Income statement: - Net Income is the beginning point in CF statement - Interest Expense is a function of debt from the BS - D&A is a function of Property, Plant, and Equipment (PP&E) from BS - Net Income x ( 1 - Payout Ratio) = Retained Earnings
Cash Flow Statement: - Organized into CF from operations, CF from investing, CF from financing - Net Income from IS
Balance Sheet: - Debt is impacted from CF from Financing: mandatory amortization + optional amortization - Cash balance is determined as mentioned above from the CF statement - Assets decreased by D&A - Retained earnings impacted from supplementary section of IS
Just a quick and dirty overview. I know some people will want to get on here and point out everything I missed or didn't go into enough detail on... they'll wanna show off and tell you about impairments on goodwill, asset write-downs, deferred tax liabilities, etc... but this is really more or less all you need to know (assuming your in UG).
1) If I have to choose 1 financial statement which one should I choose ? (Ans: CFS) (assumption - I am choosing it to perform valuation)
2) If I have to choose any two and construct the third which 2 should I choose ? (Ans: IS and BS. To construct CFS) (One my first interview I had answered CFS and IS. To construct BS. I guess that was a big wrong.)
3) Which Financial statement has the most information (to be able to know the health of the company) ? (Ans: CFS) (Not sure if this is 100% correct. Partly because health of the company is a subjective term and it means different things to different people.)
4) If only one financial statement can be chosen to be able to construct much/most/all of the remaining two, which one should you choose ? (Ans:CFS. Again not sure if this is 100% correct.)
5) Which items appear on all the statements ? (Ans:D&A)
6) What is the sequence in which statements are prepared (typically) ? (Ans: IS, BS, CFS in that order.)
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