Which financial statement is prepared first?
A income statement
B balance sheet
C statement of retained earnings
D The financial statements can be prepared in any order.
The correct answer and explanation is :
The correct answer is:
A) Income Statement
Explanation:
Financial statements are prepared in a specific order because each statement provides information needed for the next one. The correct sequence is:
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
The Income Statement is prepared first because it calculates the company’s net income or net loss for the accounting period. This is crucial because the net income (or loss) is used in the Statement of Retained Earnings, which comes next. The Income Statement includes revenues, expenses, and profits, showing how well a company performed during a specific time.
Once the net income is determined, it is transferred to the Statement of Retained Earnings. This statement shows changes in retained earnings, which include adding net income and subtracting dividends paid to shareholders. The ending retained earnings amount is then reported on the Balance Sheet.
The Balance Sheet is prepared last because it summarizes the company’s financial position by listing assets, liabilities, and equity. The equity section includes retained earnings, which were calculated in the previous statement.
Why Not Other Options?
- B) Balance Sheet – This cannot be prepared first because it requires retained earnings from the Statement of Retained Earnings.
- C) Statement of Retained Earnings – This cannot be prepared first because it requires net income from the Income Statement.
- D) Financial statements can be prepared in any order – This is incorrect because each statement builds on information from the previous one.
Thus, the Income Statement is always prepared first in financial reporting.