Analysis and Identification of Enterprise Accounting Reports (Volume 1 and 2)

Author: Zhou Na, Wang Wanqiu
Publisher:
Publish Date: 2004-11-01
Features:
The relationship between digital reports is, on the whole, reflected in two aspects: the numerical interdependencies among report items due to the unique technical methods of accounting, and the different perspectives and levels of detail through which each report reflects the company's financial position, operating results, and cash flows.
(1) Relationship between main reports
There are many numerical interdependencies between main reports, which facilitates users of financial statements in checking their authenticity, completeness, and quality of preparation. At the same time, they collectively outline the overall financial position and operating results of the company with their respective functions and dynamic/static attributes.
Regarding the relationship between the balance sheet and the income statement, the theoretical basis of the balance sheet is: Assets = Liabilities + Shareholders' Equity, while the theoretical basis of the income statement is: Profit = Revenue - Expenses. An increase in revenue will inevitably lead to an increase in assets or a decrease in liabilities, while an increase in expenses will inevitably lead to an increase in liabilities or a decrease in assets. Therefore, an increase in profit will inevitably lead to an increase in shareholders' equity. The balance sheet, income statement, and cash flow statement constitute the main reports of the company, and their relationship is reflected in the dynamic and static relationship.
The balance sheet reflects the company's financial position at a specific point in time and is a static report. The income statement and cash flow statement, respectively, reflect the company's operating results and cash flows over a specific period and are dynamic reports. To fully reflect the status of corporate fund movement, both states need to be reported. The fund movement of the company follows a cyclical pattern: "initial relative stability — mid-term absolute movement — final new relative stability." The final relative stability differs from the initial relative stability, as the final relative stability is a new stability based on the mid-term absolute movement. Therefore, there must be a certain interdependency between dynamic and static reports.
Specifically, the difference in net assets between the final and initial balance sheets must equal the net profit of the income statement, and the difference in monetary funds and cash equivalents between the final and initial balance sheets must equal the net cash and cash equivalents of the cash flow statement.
From the perspective of reflecting future cash flows, the main reports reflect the company's financial situation from different angles, complementing and relying on each other. The balance sheet reflects the distribution of economic resources and the structure of equity at a specific point in time. Using the current value and liquidity of the company's assets and liabilities can, to some extent, predict future cash flows, as the present is the foundation for the future. Comparing the balance sheet over different periods can also predict the potential for profit growth. However, while comparing the balance sheet over different periods can provide insights into the company's operating results, this method is too general, only determining the overall profit situation and unable to further explain to what extent the operating results can predict future cash flows.
For this reason, a specialized income statement must be used to provide a detailed reflection of the company's profits and losses. However, the income statement itself has flaws, as investors are concerned about cash flow, while the income statement recognizes profit based on the accrual basis, which may lead to a situation where the company reports substantial profits while simultaneously experiencing insufficient cash flow and financial tightness.
To fully reflect the impact of the company's operating conditions on future cash flows, a cash flow statement must be prepared based on the cash basis. On one hand, the cash flow statement can reflect the company's cash flow situation, thereby making predictions about future cash flows. On the other hand, by comparing the difference between profit and cash flow, the level of profitability can be assessed.
(2) Relationship between main reports and supplementary reports
Supplementary reports are further extensions of the main reports, so there are also certain numerical interdependencies between them. The preparation of supplementary reports is to provide further explanations for important items in the main reports, enabling users of financial statements to understand the specific content of these items and deepen their analysis of the financial statements.
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