Financial Statements - Interconnectivity What is Inter-Connectivity? Inter-connectivity is just a fancy way of saying that the four required financial statements are all intertwined and connected. Amounts from one statement may flow into and impact another statement. The details pertaining to a specific account balance on one statement may be provided on another statement. For example, let's look at the Balance Sheet. The Balance Sheet shows us Assets, Liabilities, and Owners Equity. The details of the changes of the Owner's Equity section of the Balance Sheet can be found on the Statement of Owner's Equity. One of the components of the Statement of Owner's Equity is Net Income. Net Income is the profit (or loss) the company has generated during the year. The details of Net Income are shown on the Income Statement. Notice that the bottom line of the Income Statement is the same Net Income or Loss that is shown on the Statement of Owner's Equity. We now see more clearly the inter-connectivity of these three financials statements. The Statement of Cash Flows is also interconnected with the Balance Sheet. Notice that one of the items within the Assets section of the Balance Sheet is Cash. The Statement of Cash Flows provides us more detail concerning the Cash account by providing a reconciliation of beginning and ending Cash. It does this by showing all of the inflows and outflows of Cash during the year. Many of the items seen on the Statement of Cash Flows are related to the items seen on the Income Statement; however, they are not always the same. The Statement of Cash Flows also contains items related to the changes in account balances on the Balance Sheet. For this discussion on inter-connectivity, it only needs to be noted that there is a relationship between the Statement of Cash Flows and the Balance Sheet, and also between the statement of Cash Flows and the Income Statement. Due to the complexity of the relationship, the details will be saved for another presentation. For now, notice that the ending Cash balance shown on the Statement of Cash Flows matches the Cash balance shown on the Balance Sheet. As a review, inter-connectivity exists between the four financial statements. Each financial statement is connected to one or more of the other statements in some way. Understanding this concept will help you understand the four financial statements better, and how they help tell the story of a business. For more detailed explanations of these Financial Statements, and the different presentations and calculations that are used, visit the AccountingWITT Channel or AcccountingWITT.com.