Personal Balance Sheet And Total Cash And Cash Equivalents ✓ Solved

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Identify which statement each item belongs to—income statement (I), balance sheet (B), or statement of cash flows (CF). Then, explain the differences among the items within each set. Finally, discuss the relationship between the three financial statements.

Part I: Classification of Financial Items

Set 1

  • Inventory, ending balance - B
  • Cost of goods (inventory) sold during the period - I
  • Cash paid to suppliers during the period - CF
  • Accounts payable, ending balance - B

Set 2

  • Accounts receivable, ending balance - B
  • Cash received from customers - CF
  • Sales - I

Set 3

  • Wage expense for the period - I
  • Wages payable, ending balance - B
  • Cash paid for wages during the period - CF

Set 4

  • Property, plant, and equipment, ending balance - B
  • Cash paid for property, plant, and equipment during the period - CF
  • Cash received from selling property, plant, and equipment during the period - CF
  • Depreciation expense during the period - I

Set 5

  • Notes payable, ending balance - B
  • Cash received from borrowing money during the period - CF
  • Cash used to pay off notes payable during the period - CF
  • Interest expense during the period - I

Part II: Relationship between the Three Financial Statements

The balance sheet, income statement, and statement of cash flows are interconnected and collectively provide a comprehensive overview of a company’s financial health.

The Balance Sheet

The balance sheet presents a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time. Assets such as cash, inventory, property, and receivables represent resources owned or controlled by the company. Liabilities include obligations like loans, accounts payable, and notes payable. Shareholders’ equity reflects the owners' residual interest after liabilities are deducted from assets.

The Income Statement

The income statement details a company’s revenues, expenses, and profits over a specific period. It reflects operational performance, including sales revenue, cost of goods sold, wages, depreciation, and interest expenses. Profit or loss derived from this statement affects retained earnings in the equity section of the balance sheet.

The Statement of Cash Flows

The cash flow statement tracks the inflow and outflow of cash during a period, segmented into operating, investing, and financing activities. It explains changes in cash balances reported on the balance sheet. For instance, cash received from customers increases cash from operating activities, whereas cash paid for equipment is listed under investing activities. Borrowing money or repayment of debt appear under financing activities.

The Interrelationship of Statements

The three statements are intimately connected. Net income from the income statement, for example, ultimately affects retained earnings on the balance sheet. Changes in cash reported in the statement of cash flows reconcile the beginning and ending cash balances on the balance sheet. Additionally, investing activities (purchase or sale of property/equipment) and financing activities (borrowing or repaying debt) influence both the cash flow statement and the asset and liability sections of the balance sheet.

Conclusion

Understanding how these financial statements relate is crucial for analyzing a company's financial stability and performance. They provide different perspectives—balance sheet for a financial position, income statement for profitability, and cash flow statement for liquidity—yet together deliver a comprehensive financial overview essential for decision-making by investors, managers, and creditors.

References

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
  • Anthony, R., & Reece, J. (2018). Financial Accounting: Tools for Business Decision Making. McGraw-Hill Education.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. (2019). Financial Statement Analysis. McGraw Hill Education.
  • Higgins, R. C. (2018). Analysis for Financial Management. McGraw-Hill Education.
  • Penman, S. H. (2019). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
  • Revsine, L., Collins, W. W., Johnson, W. B., & Mittelstaedt, F. H. (2015). Financial Reporting and Analysis. Pearson.
  • Stickney, C. P., Brown, P., & Wahlen, J. M. (2018). Financiаl Reporting and Analysis. Cengage Learning.
  • Deegan, C. (2018). Financial Accounting Theory. McGraw-Hill Education.
  • Gibson, C. H. (2017). Financial Reporting & Analysis. South Western Educational Publishing.

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