Chapter 6, Problem 1DQ

When calculating a ratio with numbers from the balance sheet and income statement, why must you use the balance sheets from the beginning and end of the period covered by the income statement?

To determine

Explain the reason for use of the balance sheet from the beginning and end of the period covered by the income statement while computing a ratio with the numbers from the balance sheet and income statement.

Explanation of Solution

It is compulsory for the reason that the income statement depicts all transactions between the beginning and end of the given period, while the balance sheet depicts the split points in time at each end of the period capped by the income statement.