Final answer:
The three main financial statements must be prepared in order due to their interrelation, where each subsequent statement depends on the accuracy of the previous one. This ensures a clear financial performance overview and sound financial management, similar to an individual maintaining a budget or balancing a checkbook.
Step-by-step explanation:
The three primary financial statements must be prepared in order when done manually because they are interconnected and rely on information from each other to be complete and accurate. The Income Statement reports the company's revenues and expenses, which ultimately determine the net income or loss for a period.
This net income is then transferred to the Retained Earnings section of the Balance Sheet, which is a snapshot of the company's assets, liabilities, and owner’s equity at a specific point in time. After adjusting for dividends, the adjusted retained earnings amount contributes to the Stockholder's Equity section on the Balance Sheet.
Lastly, the Cash Flow Statement uses the data from the Income Statement and changes in Balance Sheet figures to show how changes in balance sheet accounts affect cash.
Creating a budget and carefully managing cash flow is essential to ensure a company has enough money to cover its expenses. This is analogous to an individual balancing a checkbook to manage personal finances, avoid overdrafts, and maintain adequate funds.
Similarly, companies prepare financial statements meticulously to keep track of their financial well-being and assure that they’re making more money than they spend.
Furthermore, even profitable companies may require outside investors to access additional financial capital to fund expansion, cover large expenses, or attain financial stability without depleting their own resources.