Which of the following is the correct order for preparing the financial statements?

• A. Statement of Cash Flows, Balance Sheet, Income Statement, Statement of Retained Earnings
• B. Balance Sheet, Income Statement, Statement of Retained Earnings, Statement of Cash Flows
• C. Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows
• D. Statement of Retained Earnings, Income Statement, Statement of Cash Flows, Balance Sheet

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the purpose of each financial statement. The Income Statement summarizes revenues and expenses to determine net income or loss for a period. The Statement of Retained Earnings shows changes in retained earnings, including net income and dividends. The Balance Sheet provides a snapshot of assets, liabilities, and equity at a specific point in time. The Statement of Cash Flows details cash inflows and outflows from operating, investing, and financing activities.
2. Step 2: Recognize the logical sequence for preparing financial statements. The Income Statement is prepared first because it calculates net income, which is needed for the Statement of Retained Earnings.
3. Step 3: Prepare the Statement of Retained Earnings next. This statement uses the net income from the Income Statement to update retained earnings, factoring in dividends paid during the period.
4. Step 4: Use the updated retained earnings figure to complete the Balance Sheet. The Balance Sheet requires accurate equity information, which includes retained earnings.
5. Step 5: Finally, prepare the Statement of Cash Flows. This statement uses information from the Balance Sheet and Income Statement to classify cash transactions into operating, investing, and financing activities.