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Understanding
3 Financial

Statements
The three financial statements include: (1)

the Income Statement, (2) the Balance

Sheet, and (3) the Cash Flow Statement.

These three core statements are intricately

linked to each other and this guide will

explain how they all fit together.

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Income

Statement
The Income Statement is a thorough

overview of the net income genetrated by

the particular business in that fiscal year.

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Key Features
1. The income statement shows sales revenue

at the top
2. It then deducts the cost of goods sold

(COGS) to find gross profit

3. The gross profit is affected by other

operating expenses and income to reach net

income
The income statement highlights the revenue
and expenses of a business over a period of
time (i.e., 1 year, 1 quarter, Year-to-Date, etc.).
Used as a tool to assess profitability, these
statements use accounting principles such as
matching and accruals to represent figures
(not presented on a cash basis).

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Balance

Sheet
The Balance Sheet provides a detailed

analysis of the firm's assets, liabilities and

shareholder's equity.

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Key Features
1. The asset section begins with cash and cash

equivalents
2. It then displays the changes in each major

account from period to period

3. Net income flows from the income

statements into the balance sheet as a

change in retained earnings (adjusted for

payment of dividends)
The Balance Sheet depicts the financial
position of the company at any given point of
time. It works on the formula of assets must
equal liabilities plus equity (Assets =
Liabilities + Shareholders Equity)

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Cash Flow
Statement
The Cash Flow Statement shows the

movement of cash in the firm over a period

of time.

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Key Features
1. It takes into account net income and adjusts

it for any non-cash expenses

2. Using the change in balance sheet, it

highlights usage and receipts of cash

3. It displays the change in cash flow through

three sections: cash from operations, cash

used in investing, and cash from financing

The Cash Flow Statement undoes all

accounting principles to show pure cash
movements along with beginning balance
and ending balance of cash. It elucidates the
net cash change over a period of time, an
accounting period (i.e., 1 year, 1 quarter, Year-
to-Date, etc.) for the firm.
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