What is the correct order of the financial statements as they relate to each other?

The correct order of financial statements is crucial for understanding how they interrelate and build on one another. The Income Statement is completed first as it summarizes revenues and expenses, yielding net income. This net income is then used in the Statement of Retained Earnings, which outlines how that income is distributed either by dividends or retained in the business.

Following the Statement of Retained Earnings, the Balance Sheet is prepared. It represents the firm's financial position at a specific point in time, capturing assets, liabilities, and equity. The equity section reflects the cumulative effects of the previous statements, showing retained earnings calculated from the earlier steps.

Lastly, the Statement of Cash Flows provides insights into cash inflows and outflows from operating, investing, and financing activities. While it summarizes details of how cash is generated and used, it's positioned last since it does not alter the results presented in the other statements but rather complements them by providing a cash perspective.

Understanding this sequence is essential in comprehending how financial performance flows into financial position and is ultimately reflected in cash movements.