How Parts of the Financial Statements Fit Together

A Summary of Accounting Relations

The Balance Sheet

Assets
- Liabilities
=Shareholders' equity


The Income Statement

Net revenue
- Cost of goods sold
= Gross margin
- Operating expenses
= Operating income before interest and taxes (ebit)
- Interest expense
= Income before taxes
-  Income taxes
= Income after tax and before ordinary items
+ Extraordinary items
= Net income
- Preferred dividends
= Net income available to common


Cash Flow Statement (and the Articulation of the Balance Sheet and Cash Flow Statement)

Cash flow from operations
+ Cash flow from investing
+ Cash flow from financing
= Change in cash


Statement of Shareholders' Equity (and the Articulation of the Balance Sheet and Income Statement)

Beginning equity
+ Comprehensive income
- Net payout
= Ending equity

Net Income
+ Other comprehensive income
= Comprehensive income

Dividend
+ Share repurchases
= Total payout
- Share issues
= Net payout

The Statement of Shareholders' Equity

The statement of shareholders' equity starts with beginning-of-the period equity and ends with end-of-the period equity, thus explaining how the equity changed over the period. 

For purposes of analysis, the change in equity is best explained as follows:

Ending equity = Beginning equity + Comprehensive income - Net payout to shareholders

----

Beginning equity
+Comprehensive income
- Net payout
___________________
=Ending equity
___________________


This is referred to as the STOCKS AND FLOWS EQUATION for equity because it explains how stocks of equity (at the beginning and end of the period) changed with flows of equity during the period. 

Owners' equity increases from value added in business activities (comprehensive income) and decreases if there is a net payout to owners. 

Net payout is amounts paid to shareholders less amounts received from share issues.  As cash can be paid out in dividends or share repurchases, net payout is stock repurchases plus dividends minus proceeds from share issues. 

----

Dividends
+ Share repurchases
_______________
= Total Payout
-Share issues
_______________
= Net Payout
_______________

Comprehensive income includes net income reported in the income statement pl,us some additional income reported in the equity statement.  The practice of reporting income in the equity statement is known as DIRTY SURPLUS ACCOUNTING, for it does not give a clean income number in the income statement.  The total of dirty surplus income items is called OTHER COMPREHENSIVE INCOME and the total of net income (in the income statement) and other comprehensive income (in the equity statement) is COMPREHENSIVE INCOME:

Comprehensive income = Net Income + Other comprehensive income

----

Net Income
+ Other comprehensive income
________________________
Comprehensive income
________________________

A few firms report other comnprehensive income below net income in the income statement and some report it in a separate "Other Comprehensive Income Statement."