Financial Statements: Which is Typically Prepared Last?

Introduction

Financial statements are documents used to report a company’s financial performance and position. There are three main types of financial statements typically prepared: balance sheet, income statement, and cash flow statement. The order of these statements is important, as it can affect the accuracy and relevance of the information within each statement. This article will explore which statement is typically prepared last and the impact of the order on the accuracy and relevance of the information.

Comparison of Financial Statements

The balance sheet is a snapshot of a company’s financial health at a specific point in time. It includes assets, liabilities, and equity. Assets include cash, inventory, and accounts receivable. Liabilities include accounts payable and long-term debt. Equity is the difference between assets and liabilities. The income statement shows a company’s revenues and expenses over a period of time. It includes operating revenue, operating expenses, non-operating revenue, and non-operating expenses. The cash flow statement details the cash inflows and outflows of a business over a period of time. It includes operating activities, investing activities, and financing activities.

So, which of these statements is typically prepared last? According to a survey by Accounting Today, the answer is the cash flow statement. Out of the 500 accountants surveyed, 66% said that the cash flow statement was the last document they prepared when closing out their books. The other 34% indicated that they prepare the income statement last.

Impact of Order on Accuracy and Relevance

The order in which the financial statements are prepared has an impact on the accuracy and relevance of the information. For example, the income statement will be affected by the entries in the balance sheet. If the balance sheet is not up to date or does not reflect the full picture of the company’s finances, then the income statement may not provide accurate information. Similarly, the cash flow statement will be affected by the entries in the income statement. If the income statement does not accurately reflect the company’s revenue and expenses, then the cash flow statement will be inaccurate.

It is also important to consider how the different financial statements interact with each other. For example, if a company pays off a loan, it will show up in both the balance sheet and the cash flow statement. If the balance sheet is not up to date, the loan payment may not be reflected in the cash flow statement, resulting in an inaccurate statement.

Importance of Preparing the Statements in the Right Order

It is important to prepare the financial statements in the right order in order to ensure accuracy and relevance. A study conducted by the University of Tennessee found that businesses who did not prepare their financial statements in the correct order experienced issues such as double counting, incorrect amounts, and inaccurate reporting. These issues can lead to major problems down the line, including fines from the IRS and difficulty obtaining financing.

Steps and Considerations for Preparing Financial Statements in the Correct Order

When preparing financial statements, there are several steps and considerations to keep in mind. First, the accountant should ensure that all transactions and entries have been recorded correctly in the general ledger. Next, the accountant should review and reconcile all accounts to ensure accuracy. Once this is done, the accountant can begin preparing the statements in the following order: balance sheet, income statement, and then cash flow statement.

Conclusion

In conclusion, it is important to prepare financial statements in the right order in order to ensure accuracy and relevance. The order of preparation typically follows the balance sheet, income statement, and then cash flow statement. Each statement depends on the accuracy and relevance of the information in the previous statement, so preparing the statements in the wrong order can result in inaccurate information. By following the steps and considerations outlined above, businesses can ensure their financial statements are prepared in the correct order and are providing accurate and relevant information.