Select the financial statement to which the item belongs. Items a. The change in retained earnings due to fet income and dividends. b. Amount of cash received from borrowing money from a local bank. c. Revenue from sales to customers during the year. d. Gains from foreign currency translations. e. Total amounts owed to workers at the end of the year. Financial Statements
The Correct Answer and Explanation is:
To correctly identify the financial statements to which each item belongs, we must understand the purpose of each of the four main financial statements:
- Income Statement (IS) – Shows a company’s revenues and expenses over a period of time, leading to net income or loss.
- Statement of Retained Earnings (or Statement of Changes in Equity) – Shows changes in retained earnings from net income and dividends over a period.
- Balance Sheet (BS) – Shows a snapshot of a company’s assets, liabilities, and equity at a specific point in time.
- Statement of Cash Flows (SCF) – Shows how cash is generated and used in operating, investing, and financing activities over a period.
Matching Items with Financial Statements:
a. The change in retained earnings due to net income and dividends.
Answer: Statement of Retained Earnings
This statement summarizes how retained earnings have changed due to net income and dividends. Net income increases retained earnings, while dividends decrease it. It links the income statement and balance sheet.
b. Amount of cash received from borrowing money from a local bank.
Answer: Statement of Cash Flows
This is a financing activity. Borrowing money is a cash inflow and is recorded in the financing section of the Statement of Cash Flows.
c. Revenue from sales to customers during the year.
Answer: Income Statement
Revenue represents the earnings from primary business activities. It is the first line on the income statement and crucial in calculating net income.
d. Gains from foreign currency translations.
Answer: Statement of Comprehensive Income (or included in Equity section if OCI is not separate)
These gains are often classified under Other Comprehensive Income (OCI), which extends beyond the income statement. If the company presents a combined statement, it appears in the Statement of Comprehensive Income.
e. Total amounts owed to workers at the end of the year.
Answer: Balance Sheet
These amounts are liabilities—typically under “salaries payable” or “accrued expenses”—and are shown in the current liabilities section of the balance sheet.
Summary Table:
| Item | Financial Statement |
|---|---|
| a. | Statement of Retained Earnings |
| b. | Statement of Cash Flows |
| c. | Income Statement |
| d. | Statement of Comprehensive Income |
| e. | Balance Sheet |
Understanding these categories is crucial for analyzing a company’s financial health and operations.