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Chapter 5 discussion - This net income is then rolled into...

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Explain concisely how the three financial statements relate to each other. If they actually do relate. If so, could you complete one financial statement without completing the others. You may include the Statement of Retained earnings to make it four financial statements. I agree with Tracy that illustrations 5-1 & 5-2 are great examples. It shows how all four – Trial Balance, Income Statement, Statement of Retained Earnings and the Balance Sheet relate to each other. In the example for the Overnight Auto Service it shows how the adjusted trial balance was used to first prepare the Income Statement (Revenues and Expense) to find the net income.
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Unformatted text preview: This net income is then rolled into the statement of retained earnings. As it is net income the amount gets added to the prior retained earnings balance, which was zero in this example as the company just started in May. Any dividends declared during the period are subtracted from the retained earnings to arrive to the ending retained earnings balance. This amount is shown on the balance sheet as one of the components of the owner’s /stockholder’s equity. In general it would not be possible to complete one without the information from the other....
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