Question

What are the outputs of the accounting cycle? Why are they important? Identify and explain the purpose of each financial statement, including how

they are interrelated.

Answer 1

At the end of an accounting cycle we have following 3 statements as an output: income statement, balance sheet and statement of retained earnings.

All these statements are important for judging the performance of the any company. It allows in analysing successes or failures and plan how can the company improve it's performance.

Income statement helps in analysing whether company made profits or losses from its current activities. It is computed using revenue and expenses.

The next statement is statement of retained earnings , it shows how much company is willing to retain after distributing it's profits to it's shareholders.

And lastly the balance sheet of a company shows assets , liabilities and stockholders equity. It does not include overall detailed information but just have the year end balances.

All these statements are inter related because firstly the net income is computed in the income statement which is used for distributing profits to the shareholders which is shown in statement of retained earnings.And finally the year end balance of statement of retained earnings is shown in balance sheet. Hence each of these are dependent on another.