Chapter 2, Problem 8CT

Summary Introduction

Financial Statements:

Financial statements are the accounting reports of any organization that are prepared with a purpose to disclose its past performance and also the assets and liabilities of the company along with the finances. These statements are prepared either on an annual basis or on a quarterly basis.

Balance Sheet

Balance sheet is one of the financial statements of the company which represents the financial health of the organization for a particular point of time. It exhibits all the assets and liabilities of the company and it stands to be true only at a particular point in time because each and every transaction that a company makes has some or the other effect on the assets and the liabilities of the firm. The formula of the balance sheet is written as under:

Income Statement

The income statement of a firm is also referred to as the profit and loss statement. It is one of the financial statements of a company. The income statement shows the financial performance of a company for a particular period of time. It lists down all the revenues and expenses of a firm for a particular time period. Basically it calculates the net profit or net loss of the company which is carried forward to the balance sheet.

Net Income or Earning

The net income, also called as the earnings of the firm is calculated in the income statement where all the expenses and losses of the firm for a particular time period are listed. It is the measure of profitability of the firm.

To Identify:

The relationship between the balance sheet and income statement.