 Hello, in this presentation, we will discuss the discussion question of discuss the relationship between financial statements. If asked an essay question like this, first we would probably want to define the financial statements. First, defining financial statements by just listing the financial statements. So when looking at the relationship between financial statements, it's good to just say, hey, here are the financial statements that we're going to list out. These are going to be the links that we are looking for between these particular statements. So the financial statements will include the balance sheet, the income statement, the statement of equity or retained earnings, and depending on if we are a sole proprietor or a partnership statement of partnership equity or a corporation statement of retained earnings or statement of owners equity or stockholders equity, and then we're going to have the statement of cash flows. So first, we just want to list those things out and that'll help us to structure in our mind what are we looking for between these related information? So then we can give some description and we might be able to pick up some points just by giving some basic points that are always there within the financial statements such as the balance sheet. It's going to be reported as of a point in time. That's always a key term that we want to say and there's a reason for it because we want to know that the balance sheet is reporting where the company stands at a particular point in time. Unlike the three other statements, which typically have to have a beginning and ending date, for example, the income statement, revenue and expenses need to be stated for the month ended or for the year ended or something like that, indicating both the beginning time frame and the ending time frame in order to measure performance over time. The same will be true for the statement of equity, whatever that equity is, whether it be statement of owner's equity, statement of partnership equity, statement of stockholders equity. What we're doing there is saying this is the book value at the beginning of the time period. Here's what happened. Here's the change. Here's the net income that increased it. Here's the dividends or draws that decreased it. Here's the investments or the common stock that increased it and here's the ending balance. We need the activity happening over the time frame and then the ending time we need, I'm sorry, then the statement of cash flows. We're going to have clearly a timing statement as well because we're talking about cash flows. What's happening to cash? What's the activity within cash? So we're going to have the beginning cash and then we're going to have those changes in cash and that's what we're really measuring. So we need a beginning and an ending date in order to measure those changes within those cash flows. Now, that typically is a really good place to start because it kind of gives an idea as to how these are going to be related. What are they going to be the relationships between the balance sheet and these timing accounts? Well, part of it is that the balance sheet is just a static point in time. It's the point at the end of the time frame that we're looking at over any given financial statement period. If we're looking for the year ended, for example, of then the balance sheet is as of December 31st, the last day of the calendar year, if we're using a calendar year. And then the the income statement, the statement of equity and the statement of cash flow then is going to describe the activity that's happening over the year. It's got to go back in time and describe what is happening. And it's basically telling a story. The other financial statements are telling a story and they're trying to say, here's where we started. Here's all the stuff that happened. Here's where we ended. Where are we going to end then at the point in time of the balance sheet? So that's one way you can kind of conceptualize these relationships when you're going to say, hey, what are the specific numbers you're talking about here? We can think of the balance sheet then. Remember, that's the whole accounting equation. Assets, liabilities and equity all being represented on the balance sheet. If we were to ask ourselves what number on the balance sheet would be the most representative number on the balance sheet, it wouldn't be total assets. It wouldn't be total liabilities and equity, even though those two tie out. And that's what proves to us that we are in balance. The number that we really look for is the equity number, the total equity number. Why? Because that represents the book value, the net assets. It represents assets minus liabilities. It represents if we had sold the company and got all the assets in cash and then paid off all the liabilities. In theory, that's how much the owners would then have if they were to walk away from the business. That then is supposedly the value of the business. I say supposedly because that's the book value. If we were to sell something like property, plants and equipment, we may not get the exact value that we had on the books. We almost certainly would not. But that's our estimate as to the book value of the company. So when we look at the other statements then, that's our ending number. That's really where we end up at. If you say, where does this company stand at this point in time? What's its worth? What's its net value? What's its net assets? That would be the equity section. So what we're doing then is we're looking for the other statements to tell the story of how we got to that point in time. So therefore, that same number is going to be found on the statement of equity. Whether it be the statement of stockholders equity or the statement of partners equity or the statement of owners equity, whether we're talking about a corporation partnership or a sole proprietor, the end number will tell us what the same number that is on the balance sheet. That's what's going to tie out. That's the relationship. So when we look at the balance sheet, we should be able to find that same total equity number on the statement of equity. If we cannot, something is wrong. And the statement of equity is just telling us, hey, this is the beginning balance last year. This was the ending balance as of the end of December last year or January 1st of this year. That's the beginning balance. Then we got the activity, the stuff that happened in summary, like net income and draws and investments. And then we have the ending number. That's where we ended up at. That's our point in time. That's the balance sheet area. Now we need more detail than that. And the most detail is actually on the income statement, the income statement showing the revenue and expenses. So when we really want to know the story, the meat of the story, the major components of the story in most of its detail, we're looking at the income statement, because that's going to tell us how much revenue we generated over the time period, over the year or the month. And that'll tell us how much expenses we have incurred in order to generate to that revenue over the year or the month. The net income then calculated as revenue minus expenses. That's the bottom line number that tells us the net of what happened over that time period in terms of revenue generation over the year or month. So that net income number isn't going to be what's on the balance sheet. It doesn't tie to the balance sheet at all because it doesn't give us all the detail. It just tells us what's happening in revenue generation. We need that last statement that we just talked about, the statement of equity in order to tie up the net income. So the statement of equity is the one that's going to tie out to the balance sheet. The statement of equity is going to have the beginning equity balance that being gotten from last year. So last year's ending balance is this year's beginning balance. Then we're going to add to that net income. So the net income is related. So the net income that's on the income statement over any time period should be found on the statement of equity. If it is not, something's wrong. And then we're going to have the draws as well on the statement of equity or the dividends whether we're a corporation or a sole proprietor or a partnership. And we will have any kind of investments. Again, if we're a sole proprietor we'll have investments. If we're a corporation they might have issued stock. And then we'll have the ending balance in the equity. That ending equity balance then is what should tie out to that prime number on the balance sheet which will be the equity section where we stand at a point in time. Then we have the statement of cash flows. And of course the statement of cash flows, the idea of the statement of cash flows is to represent the cash flows. One component, the first component of the statement of cash flows is the statement that flows of operations are really what we're trying to do is look at the income statement operations if we were on a cash flow basis rather than on a cruel basis. So we're going to basically try to find the cash flows that are happening related to operations. And then of course we have operating, financing, investing activities. And the cash flows is going to be a timing statement as well. We're going to have the beginning cash flow. That's going to be the ending of last year. Then we're going to show what happened over time meaning the net inflows and outflows in category of the related activities, operating, investing, financing. And if we then add or subtract those two, we will get the ending cash flow. And therefore the ending cash flow on the statement of cash flows should also be found on the balance sheet as of a point in time. Cash flow statement needing the beginning and ending, needing to show the activity over time, but ending then at the point in time showing where cash is at as of that point in time, which of course should also be found on the balance sheet which shows all permanent accounts, all of the balance sheet accounts as of that point in time. So those are going to be the relationships. So just to recap, if you just had to kind of list the numbers out that you're just trying to take and tie off in terms of the financial statements to double check to see just a quick check if there's an error for sure. If these numbers don't tie out, there's an error for sure. So clearly the total assets have to equal the total liabilities and equity. That's on the balance sheet. So if those two numbers are not in balance, you're not in balance. But that doesn't relate to any other financial statements, but that's the first big check. Then you know that we have the equity section on the balance sheet, the total equity. It's going to be on the balance sheet. That total equity section should be matching to the ending balance on the statement of equity. Those two have to match. If they don't, there's a problem. And then the ending number on the income statement called net income or net loss, if we had loss, needs to be found as well on the statement of equity as part of and usually the main part of the change in the equity from the beginning equity to where we are at the end of the time period. And then of course, the statement of cash flows, the ending number in the statement of cash flows will be the cash flows after the point in time, the ending time period, that then should always match what is on the balance sheet under the statement of cash flows on HEMSAR. What is on the balance sheet under cash? So the balance sheet cash amount will equal the statement of cash flows balance amount.