Financial statement linkage description

Financial statement linkage description

• A. The cash flow statement is independent of the income statement.
• B. Net income flows into retained earnings on the balance sheet, and the cash flow statement begins with net income.
• C. The balance sheet can be prepared without considering the income statement.
• D. Net change in cash is not related to the balance sheet.

Answer: (B)

This item tests how financial statements are interlinked. Net income from the income statement increases retained earnings, a component of shareholders’ equity on the balance sheet. The cash flow statement uses net income as its starting point and then adjusts for non-cash items and changes in working capital to show cash from operations. Because of these linkages, the description that net income flows into retained earnings and that the cash flow statement begins with net income best captures how the statements connect. The cash flow statement isn’t independent of the income statement, the balance sheet reflects the income statement through retained earnings, and the net change in cash relates to the cash balance shown on the balance sheet.

This item tests how financial statements are interlinked. Net income from the income statement increases retained earnings, a component of shareholders’ equity on the balance sheet. The cash flow statement uses net income as its starting point and then adjusts for non-cash items and changes in working capital to show cash from operations.

Because of these linkages, the description that net income flows into retained earnings and that the cash flow statement begins with net income best captures how the statements connect. The cash flow statement isn’t independent of the income statement, the balance sheet reflects the income statement through retained earnings, and the net change in cash relates to the cash balance shown on the balance sheet.