Balanc

e
Sheet

Income
Statement

Cash
Flow

The Financial
Statements
Josh Aharonoff

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1
About
this guide

In this guide you’ll learn about the

3 financial statements:

Income Statement

Balance Sheet

Cash Flow

Josh Aharonoff

The Financial Statements 2

Contents
1 The income statement 4
What is an income statement? 5

What are the sections of the income statement? 7

Why is the income statement important? 9

2 The Balance Sheet 10

What is a balance sheet? 11

What are the sections of a balance sheet? 13

Why is the balance sheet important? 15

3 The Cash Flows 16

What is the cash flows? 17

What are the sections of the statement of cash flows? 19

Why is the statement of cash flows important? 21

4 Bonus: Build a 3 statement 22

model

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The Financial Statements 3

 The Income
Statement
1

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4
 What is an income
statement?
Also referred to as “Profit & Loss”

An Income Statement shows you

The profitability, and
components that affect
the profitability, of your
business

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The Financial Statements - The Income Statement 5

It helps you understand
what you are EARNING
And what expenses you are CONSUMING
at different levels of the business

Gross Profit
The profit after you subtract
your cost to carry out the
service or good

Net Income
the profit remaining after
subtracting out all expenses
and other income / expense
from gross profit

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The Financial Statements - The Income Statement 6

 What are the
sections of the
income statement?

Revenue
COGS
Gross Profit
Operating Expenses
Net Operating Income
Other Income
Other Expenses
Net Other Income
Net Income

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The Financial Statements - The Income Statement 7

 Revenue
What you are EARNING

COGS
The cost to carry out your Revenue

Gross Profit
Revenue - COGS. Gross Profit is an important metric,
and is often shown as a % (called Gross Margin)

Operating Expenses
All business expenses that are not a cost of goods
sold…like rent, software, payroll

Net Operating Income

Gross Profit - Operating Expenses

Other Income
earnings from non traditional business sources

Other Expenses
expenses consumed from non traditional business
sources

Net Other Income

Other Income - Other Expenses

Net Income
Net Operating income + Net Other Income
(or your very bottom level profitability)

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The Financial Statements - The Income Statement 8

 Why is the
income statement
important?

The income
statement helps you
understand the true
nature of what is
being generated in
your business in
terms of profits /
expenses

It is common for startups to continue to

post negative net income during their early
to mid years, while reinvesting in growth

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The Financial Statements - The Income Statement 9

 Balance Sheet

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10
 What is a
Balance Sheet?

The Balance Sheet

shows the cumulative
net worth of an
organization

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The Financial Statements - Balance Sheet 11

It helps
you understand

What the Assets

company OWNS

What the Liabilities

company OWES

How the Equity

company has been funded

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The Financial Statements - Balance Sheet 12

 What are the
sections of the
Balance Sheet?

Assets

Liabilities

Owners Equity

ASSETS = LIABILITIES +
OWNERS EQUITY

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The Financial Statements - Balance Sheet 13

 Assets
What the company owns
Assets represent items (tangible or
intangible) that provide economic
benefit

Examples include Cash, Accounts

Receivable, Prepaid Expenses

Liabilities
What the company OWES
Examples include Accounts Payable,
Credit Cards, Deferred Revenue, Notes
Payable

Owners Equity
Amounts invested by the owners, and the
total history of earnings not paid out to
shareholders

Examples include Investment from

Owners, Preferred Stock, Common Stock,
Retained Earnings

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The Financial Statements - Balance Sheet 14

 Why is the
Balance Sheet
important?

A balance sheet helps

you understand how
liquid the company is,
and it’s net cash
position

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The Financial Statements - Balance Sheet 15

 The Statement of
Cash Flows

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16
 What is a
Statement of
Cash Flows?

A Statement of Cash
Flows shows you the
details behind the
movements in your cash

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The Financial Statements - The Statement of Cash Flows 17

It can be
compiled using

The DIRECT
method
Showing cash received from customers, cash
paid to vendors etc.
More insightful, but also more
challenging to produce

The INDIRECT
method
presented as your net income + the sum of the
movements in the accounts on your balance sheet
Very easy to produce, usually requires a
deep understanding of accounting terms
& principles to understand

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The Financial Statements - The Statement of Cash Flows 18

 What are the
sections of the
Statement of Cash
Flows?

Cash from Operating

Activities

Cash from Investing

Activities

Cash from Financing

Activities

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The Financial Statements - The Statement of Cash Flows 19

 Cash from Operating Activities
Your cash movements related to net income
+ the change in all balance sheet account
related to the OPERATIONS of the business
current assets —> Accounts Receivable,
Inventory, Prepaids
current liabilities —> Accounts Payable,
Deferred Revenue

Cash from Investing Activities

Your cash movements related to LONG
TERM assets or investments of the
business
Long term assets —> Goodwill
Fixed Assets —> Machinery & Equipment,
Computers

Cash from Financing Activities

Your cash movements related to
FINANCING activities
Equity —> Cash invested by owners
Debt —> Cash invested by lenders

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The Financial Statements - The Statement of Cash Flows 20

 Why is the
Statement of Cash
Flows important?

Your cash is your

oxygen mask! You need
to ensure you have
enough of it at all times

The statement of cash flows helps you

understand how your cash is moving

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The Financial Statements - The Statement of Cash Flows 21

 BONUS:
3 statement
model
4

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22
 Download FREE
3 statement model template

Link to Excel file

mightydigits.com/startup-3-statement-model

Put them all together and forecast

your cash flows using a 3 statement
model template

Link to video

https://www.mightydigits.com/startup-3-statement-model

Josh Aharonoff

The Financial Statements - BONUS: 3 statement model 23

Thanks for
reading!
Did you enjoy this content?
Do you have anything to add?
Questions?

24
 Author

Josh
Aharonoff

I help startups Scale their Finance &

Accounting with amazing reporting
& financial operations

Find out why over 40 startups

trust me each month:

https://www.mightydigits.com/book-meeting

+ Follow me on Linkedin for more Startup Finance & Accounting tips

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The Financial Statements 25