Financial statements linkage statement

Financial statements linkage statement

• A. The cash flow statement starts with net income from the income statement
• B. The balance sheet can be created without any cash flow data
• C. The income statement and cash flow statement are not connected
• D. Net income does not affect the cash balance

Answer: (A)

Profits shown on the income statement are the starting point for linking to cash. In the cash flow statement, especially using the indirect method, you begin with net income from the income statement and then adjust for non-cash items (like depreciation) and changes in working capital to arrive at cash provided by operating activities. This is the core way the statements connect: what you earned as income needs to be reconciled to the actual cash that flowed in or out during the period. That cash figure then feeds into the cash balance on the balance sheet, while net income also increases retained earnings on equity. So the statement that the cash flow statement starts with net income from the income statement best captures this linkage. The other ideas imply there’s no connection or that net income doesn’t affect the cash balance, which isn’t true because net income is the starting point for reconciling to cash and it ultimately influences the cash position through operating activities and retained earnings.

Profits shown on the income statement are the starting point for linking to cash. In the cash flow statement, especially using the indirect method, you begin with net income from the income statement and then adjust for non-cash items (like depreciation) and changes in working capital to arrive at cash provided by operating activities. This is the core way the statements connect: what you earned as income needs to be reconciled to the actual cash that flowed in or out during the period. That cash figure then feeds into the cash balance on the balance sheet, while net income also increases retained earnings on equity.

So the statement that the cash flow statement starts with net income from the income statement best captures this linkage. The other ideas imply there’s no connection or that net income doesn’t affect the cash balance, which isn’t true because net income is the starting point for reconciling to cash and it ultimately influences the cash position through operating activities and retained earnings.