UNDERSTANDING ACCOUNTING TALK 20 The Balance Sheet: Mother of Financial Statements

A complete set of Financial Statements consists in the Balance Sheet, the Income Statement and the Cash Flow Statement. If no complete set is available or possible, at least there should be a Balance Sheet. The Income Statement and the Cash Flow Statement provide information regarding changes in the Balance Sheet. As a matter fact, it is possible to derive a basic Income Statement (i.e., Revenues, Expenses, and Net Income) and a basic Cash Flow Statement (i.e., Cash from Operating Activities, Investing Activities, and Financing Activities), if you had the Balance Sheets of two succeeding periods. This is so because the bottom-lines of both the Income Statement (Net Income) and the Cash Flow Statement (Ending Cash) lead into the Balance Sheet.

The results of an operating period (whether Net Income or Net Loss) increase or decrease Equity. When the combination of Operating Activities (i.e., net income or loss), Investing Activities (i.e., increase / decrease in value of investments, dividends received, or additional cash placed in investments), and Financing Activities (i.e., loan principal & interest payments, proceeds of loans received) results in additional cash, the Asset Account –Cash– is increased. When the combination results in a negative figure, the Cash Account is decreased.