Under U.S. GAAP, in what order should the financial statements be prepared?

• A. Statement of retained earnings, income statement, balance sheet, statement of cash flows
• B. Income statement, statement of retained earnings, balance sheet, statement of cash flows
• C. Balance sheet, income statement, statement of cash flows, statement of retained earnings
• D. Statement of cash flows, balance sheet, income statement, statement of retained earnings

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the purpose of each financial statement. The income statement shows the company's profitability over a period, the statement of retained earnings explains changes in retained earnings, the balance sheet presents the financial position at a point in time, and the statement of cash flows details cash inflows and outflows.
2. Step 2: Recognize that the income statement must be prepared first because it provides the net income figure needed for the statement of retained earnings.
3. Step 3: Prepare the statement of retained earnings next, using the net income from the income statement to calculate the ending retained earnings balance.
4. Step 4: Use the ending retained earnings from the statement of retained earnings to complete the equity section of the balance sheet, which is prepared third.
5. Step 5: Finally, prepare the statement of cash flows, which reconciles the beginning and ending cash balances shown on the balance sheet and explains the cash movements during the period.