Exploration · Ch 1 · An Introduction to Accounting

How the four statements fit together.

The balance sheet is the star of the show. The income statement, the statement of changes in stockholders’ equity, and the statement of cash flows all exist to explain how the balance sheet moved from last year to this year. Slide a Year 2 transaction below and watch it ripple through every statement.

Year 2 transactions · slide any to see the effect ripple through the diagram
Revenue$116,000
Expenses$62,000
Dividends$9,000
Stock issued$32,000
Land sold$200,000
Notes repaid$300,000
Balance Sheet
As of Dec. 31, Year 1
Assets
Cash$51,000
Land$500,000
Total assets$551,000
Liabilities
Notes payable$400,000
Stockholders' equity
Common stock$120,000
Retained earnings$31,000
Total stockholders' equity$151,000
Total liab. and stk. equity$551,000
Statement of Cash Flows
For the Year Ending Dec. 31, Year 2
Operating activities
Cash received from revenue$116,000
Cash paid for expenses−$62,000
Net cash from operating$54,000
Investing activities
Sale of land$200,000
Net cash from investing$200,000
Financing activities
Common stock issued$32,000
Notes payable repaid−$300,000
Dividends paid−$9,000
Net cash from financing−$277,000
Net change in cash−$23,000
Beginning cash balance$51,000
Ending cash balance$28,000
Statement of Changes in Stk. Equity
For the Year Ending Dec. 31, Year 2
Beginning common stock$120,000
Common stock issued$32,000
Ending common stock$152,000
Beginning retained earnings$31,000
Plus net income$54,000
Minus dividends−$9,000
Ending retained earnings$76,000
Total stockholders' equity$228,000
Income Statement
For the Year Ending Dec. 31, Year 2
Revenue$116,000
Expense−$62,000
Net income$54,000
Balance Sheet
As of Dec. 31, Year 2
Assets
Cash$28,000
Land$300,000
Total assets$328,000
Liabilities
Notes payable$100,000
Stockholders' equity
Common stock$152,000
Retained earnings$76,000
Total stockholders' equity$228,000
Total liab. and stk. equity$328,000
Trace your net income

Net income of $54,000 shows up in three places: the bottom of the income statement, the “Plus net income” line on the statement of changes in equity, and then baked into retained earnings ($76,000) on the Year 2 balance sheet. It never appears on the cash flow statement directly — but it drives the operating section.

The balance sheet always balances

Try any combination — even negative net income, zero dividends, a full sell-off of the land. Total assets (currently $328,000) will always equal total liabilities plus equity (currently $328,000). The three flow statements aren’t independent — they’re just three different ways of explaining how the balance sheet moved.

Where your $9,000 of dividends went

Notice: dividends never touch the income statement. They’re not an expense. They’re a return of equity to the owners. So they show up on the statement of changes in equity (reducing retained earnings) and on the cash flow statement (as a financing outflow). Slide dividends up or down and watch net income stay put while retained earnings and cash both move.

Ch 1 simplifications: all revenues and expenses are cash (no accruals yet), land is the only non-cash asset, and there is no income tax on the income statement. Accruals, deferrals, and taxes get their own chapters — they slot into this same articulation without changing the shape of it.
How the four statements fit together — Explorations — Edmonds Instructor Hub