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In what order are the three period-end financial statements prepared?
AProfit or loss, then retained earnings, then balance sheet
BBalance sheet, then profit or loss, then retained earnings
CRetained earnings, then balance sheet, then profit or loss
DBalance sheet, then retained earnings, then profit or loss
Answer & Solution
Correct answer: A. Profit or loss, then retained earnings, then balance sheet
1. The statement of profit or loss is prepared first to determine net income.
2. The retained earnings statement is next, using that net income and subtracting dividends.
3. The balance sheet is prepared last, taking its Retained Earnings figure from the retained earnings statement.
4. The other options break this dependency chain.
5. Therefore the order is profit or loss, retained earnings, balance sheet.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §1.7.4 "Balance Sheet", p.46_
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