In what order are the four primary financial statements typically prepared by a company at the end of an accounting period?

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

Answer: (C)

Verified step by step guidance

1. Understand the purpose of each financial statement: The Income Statement summarizes revenues and expenses to determine net income or loss. 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. The Statement of Cash Flows details cash inflows and outflows from operating, investing, and financing activities.
2. Recognize the logical sequence: The Income Statement is prepared first because it calculates net income, which is needed for the Statement of Retained Earnings. The Statement of Retained Earnings uses net income to determine the ending retained earnings balance.
3. Next, prepare the Balance Sheet: The ending retained earnings balance from the Statement of Retained Earnings is included in the equity section of the Balance Sheet. This ensures the Balance Sheet reflects the updated equity position.
4. Finally, prepare the Statement of Cash Flows: This statement uses information from the Balance Sheet and Income Statement to categorize cash transactions into operating, investing, and financing activities.
5. Remember the correct order: Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows. This sequence ensures all necessary information flows logically between the statements.