Interrelationships between financial statements

Hello. Janis Weber here. I'm introducing some key concepts about financial accounting, but at an introductory level. So this topic today will be interrelationships between the financial statements.

Before I start on my topic today, I wanted to introduce myself. My background in accounting spans two careers, first as a CPA in public practice and then as an accounting educator for a public university. So I'm having a great time with accounting in both fields. But I'm trying, in this series, to spark some interest in you that you maybe will decide to pursue a study of accounting further.

In previous talks, we had discussed this concept briefly about how the financial statements are tied to one another, and so that's why we had a certain order that financial statements should be prepared in. So just to remind you, the income statement must be prepared first, reflecting the revenue and expense of the company for that period of time, and it brings you to a bottom-line net income. So that net income rolls into the next statement that must be prepared, which is the retained earnings statement. The retained earnings statement is simply just a reconciliation of what changed about retained earnings. So you would start with your beginning retained earnings balance, add in this net income that flowed out of the income statement and then reduce the balance by the dividends that were paid out to shareholders. So that would leave you with an ending retained earnings balance. Just as a caveat, some financial statements don't include this retained earnings statement. Instead, they include a statement that's called a statement of owner's equity or statement of changes in stockholder equity. A lot of other names. But they would include a component that reflects this change in retained earnings in any of these statements that were covering equity. So now, once we have done the income statement, then net income figure would roll into the retained earnings statement, and once the retained earnings statement is prepared, it would give you the ending retained earnings balance that you need in order to complete the balance sheet. So that's why that's the order that they must come in. And as just a reminder, the balance sheet includes the total assets and all the claims against those, which would be the liabilities that are owed to the creditors and the equity, which is the claim that's owed to the owners. So these three have to be done in this order and that's a big part of what the relationship is between the steps.