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Relationship Between Financial Statements

Relationship Between Financial Statements

Understanding the relationship between financial statements enable you to manage business operations better. The end products of an accounting information system are the four basic financial statements that can be produced. They are :

(1) The Income Statement (2) Statement of Owner’s (Shareholder’s) Equity (3) The Balance Sheet (4) The Statement of Cash Flows

While each statement tells its own story, all four of them are connected to each other directly or indirectly. Understanding the relationship between financial statements will allow you to validate the integrity of the information provided as well as allowing you to build a better foundation for more complicated financial analysis.

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The Accounting Equation

Under U.S. GAAP (generally accepted accounting principles) financial accounting revolves more or less around one very important but simple equation. And that is: