Assessed Discussion Question: Financial Statements Kevin L. Jackson ACC/561 December 15, 2010 Edward Hastings 1.

In what ways do the elements of the financial statements interact with one another? The financial statement of a company describes the financial health of a company at a point in time. The ways the elements of the financial statements interact with one another, is revenue and expenses. Revenue is defined as the total amount of money a company earns from the sale of a product or service. Where the expenses, is the total amount incurs from doing business as a company. Multi-step income statements have some of the following subtotals: gross profit (gross margin), operating income, and income before taxes. Along with revenue and expenses are current and non-current assets no a balance sheet. Some examples of current assets include cash, inventories, and prepaid expenses. Non-current assets include property, plant, and equipment. Liabilities are divided into current and long-term liabilities including accounts payable and longterm debt. Liabilities and expenses need to be subtracted from assets and revenue to determine the financial health of a company. 2. How might changing one of the financial statements affect the other financial statements? By changing one of the financial statements this can greatly impact the other financial statements in that a balance sheet must balance out. This is assets= liabilities + equity, this shows what is available to a company. When there is a change in the balance sheet, there will be a change in the financial statement. So when the financial statement shows a profit or loss, this amount will be carried over to the balance sheet to begin the next financial statement, so if there is a change in the financial statement or balance sheet the change will affect the entry to be carried over. 3. Why is it essential to understand the relationship between the financial statements? It is essential to understand the relationship between the financial statements because it is important to understand and calculate the financial ratios for a company. These ratios provide a relationship between the different aspects of a company. For example you can calculate the current ratio of a company by dividing current assets by current liabilities. Another example is you are able to calculate a company’s profit margin by dividing their net profit by net sales. These ratios are important to fully understand the company’s operations and financial health. Even though some aspects might seem like a large amount, it might not be so large if taking into account the other entries on the statement. These relationships will provide a better sense of the well being of the company, both internally and externally.

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