Question

Why does an accountant prepare the income statement first?

a) Net income must be computed first to properly complete the other financial statements.
b) There is no particular order in which financial statements must be prepared.
c) It is easier to adjust income statement accounts first than it is to adjust balance sheet accounts.
d) Management, being profit oriented, is more interested in the company's net income than in the assets the company owns and the debts it owes.

Answer 1

The accountant prepares the income statement first to compute the net income, which is a critical figure needed for the completion of other financial statements such as the balance sheet and cash flow statement.

Step-by-step explanation:

The reason an accountant prepares the income statement first is because net income must be computed first to properly complete the other financial statements. Understanding the profitability of a company is crucial for evaluating its financial performance. Apart from that, net income from the income statement is a key component that is used in the preparation of the statement of retained earnings, which in turn is necessary to prepare the balance sheet. Moreover, the cash flows from operating activities section of the cash flow statement often starts with the net income figure. Therefore, the correct answer is a) Net income must be computed first to properly complete the other financial statements. The preparation of financial statements follows a logical order because the output of one statement is used as an input for another.