Q5RQ - Horngren'S Financial And Managerial Accounting

Question

Why are financial statements prepared in a specific order? What is that order?

Step-by-Step Solution

Answer

The balances of financial statement in sequence is transferred to another statement, which makes it mandatory. The sequence is income statement, statement of retained earnings and balance sheet.  

Step-by-Step-Solution Step 1: Explanation on Financial Statements

Financial statements are prepared at the of the accounting period, to report the performance of the business. It includes balance sheet, income statement and retained earnings. 

Step 2: Explanation on Order of Financial Statements

In the process of preparing the financial statements, first income statement is prepared as net income or loss value is used to report in the statement of retained earnings. And finally ending balance of retained earnings is entered in balance sheet under stockholders’ equity section.