5.2.5. How do the financial statements relate to each other? 

Let us say that you want to buy a new stove for your kitchen

At the end of the fiscal year, your accountant records a depreciation expense that represents the reduction in the value of the stove resulting from wear and tear during the year in the income statement.  The cash flow statement takes your net income and adds back the depreciation because it is not a cash expense. These changes in turn affect ending cash balance, which will be shown on the balance sheet. The balance sheet will show the purchase of the fridge as an addition to fixed assets at a reduced value because of depreciation. 

Let us say you generate positive net income one year

It is first recorded in the income statement. The net income is added to the statement of retained earnings and the statement of cash flow. After subtracting dividends, retained earnings are stated in the final line of the statement of retained earnings and reflected in the balance sheet under shareholders’ equity. This all goes to show that financial decisions have an impact on the numbers in your financial statements, which show the health and stability of your company.