Multiple Choice
Which of the following statements about financial statements is true?
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1. Introduction to Accounting
The Financial Statements
Multiple Choice
Which of the following is the correct order for preparing the financial statements?
A
Statement of Cash Flows, Balance Sheet, Income Statement, Statement of Retained Earnings
B
Balance Sheet, Income Statement, Statement of Retained Earnings, Statement of Cash Flows
C
Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows
D
Statement of Retained Earnings, Income Statement, Statement of Cash Flows, Balance Sheet
Verified step by step guidance1
Step 1: Understand the purpose of each financial statement. The Income Statement summarizes revenues and expenses to determine net income or loss for a period. The Statement of Retained Earnings shows changes in retained earnings, including net income and dividends. The Balance Sheet provides a snapshot of assets, liabilities, and equity at a specific point in time. The Statement of Cash Flows details cash inflows and outflows from operating, investing, and financing activities.
Step 2: Recognize the logical sequence for preparing financial statements. The Income Statement is prepared first because it calculates net income, which is needed for the Statement of Retained Earnings.
Step 3: Prepare the Statement of Retained Earnings next. This statement uses the net income from the Income Statement to update retained earnings, factoring in dividends paid during the period.
Step 4: Use the updated retained earnings figure to complete the Balance Sheet. The Balance Sheet requires accurate equity information, which includes retained earnings.
Step 5: Finally, prepare the Statement of Cash Flows. This statement uses information from the Balance Sheet and Income Statement to classify cash transactions into operating, investing, and financing activities.
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