Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 2 Basic Accounting Concepts 55

transactionsare also recorded under the retained earnings column of the balance sheet.

By doingso, the balance sheet is integrated with the income statement.

Exhibit 1 also illustrates the importance of the balance sheet as the connecting link

between the statement of cash flows and the income statement.^1 Later in this chapter,

we illustrate the use of this integrated financial statement approach for analyzing,

recording, and summarizing transactions.

You will find the integrated financial statement approach, shown in Exhibit 1, an

invaluable aid in analyzing the financial condition and changes in financial condition

of a company. This is because, without understanding how a company’s financial

statements are prepared and integrated, you may miss important trends or events. To

illustrate, assume a company reports net income (profits) on its income statement. This

might lead you to mistakenly conclude that the company’s operations are doing well

and no major changes are necessary. In fact, if the company has negative net cash flows

from operations, it may be headed toward bankruptcy. This is why it is essential to an-

alyze all the financial statements and why we emphasize the integrated financial state-

ment approach throughout this text.

1 In Chapter 3, we describe and illustrate how balance sheet elements can be used to reconcile net cash

flows from operating activities with net income.

Controls

The integrated financial statement approach shown in Exhibit 1 has built-in controls

that transactions are analyzed, recorded, and summarized correctly. Specifically, the

accounting equation ensures that total assets must equal total liabilities plus total

Exhibit 1

Integrated Financial Statement Framework

Transactions

Balance Sheet

Assets  Liabilities  Stockholders’ Equity

Assets  Liabilities  Capital Stock  Retained Earnings

XXX XXX XXX XXX

XXX XXX XXX XXX

Statement of Cash Flows

/Operating activities XXX

/Investing activities XXX

/Financing activities XXX

Increase or decrease in cash XXX

Beginning cash XXX

Ending cash XXX

Statement of

Cash Flows

Income

Statement

Income Statement

Revenues XXX

Expenses XXX

INTEGRATED FINANCIAL Net income or loss XXX

STATEMENT FRAMEWORK