Which order is correct for preparing financial statements?

The correct order for preparing financial statements begins with the Income Statement, which summarizes revenues and expenses to determine net income or loss for the period. This net income is then transferred to the Statement of Changes in Equity, which outlines how equity components, such as retained earnings or additional investments, have changed over the reporting period.

Following the Statement of Changes in Equity, the Balance Sheet is prepared. The Balance Sheet presents the company’s financial position at a specific point in time, detailing assets, liabilities, and equity. Lastly, the Statement of Cash Flows is prepared, which provides insights into the cash generated and used during the period, reconciling the beginning and ending cash balances by analyzing operating, investing, and financing activities.

This sequence is vital because the results from the Income Statement provide necessary data for the Statement of Changes in Equity and the Balance Sheet, while the cash movements reported in the Statement of Cash Flows provide a comprehensive view of liquidity relevant to both income and equity changes. By following this order, each statement effectively builds on the information provided in the previous one, ensuring coherence and clarity in the financial reporting process.