Basics of Income Statement

The income statement measures the profit generated by a company over a period. It is also known
as the Profit and Loss (P&L) statement.

● Wealth is the accumulation of profit over a period.

In the long run, a company can generate wealth only by selling its products and services.

Basics of Cash Flow Statement

The income statement does not give a holistic picture of a company’s financial position. Therefore,
another statement is required. A cash flow statement indicates the amount of cash inflows and
outflows of a company over a period.

● The following activities generate the cash inflows and outflows of a company.

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 ● The following formulae are used to calculate the total cash generated by a company in a
particular period:

Basics of Balance Sheet

While the income statement and cash flow statement try to capture a company’s performance over a
period of time, the balance sheet is a financial statement that depicts the financial position of a
company at the end of the period.

A balance sheet has two sides, as listed in the image below.

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In a balance sheet, the following equation always holds true:

The shareholders, bankers and suppliers are the fund holders of a company.

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The balance sheet shows the sources of funds acquired by a company and how it uses those funds.
It indicates the amount of money a company owns, the amount it owes to external parties, and the
amount invested by the shareholders.

Key learning points from financial statements

The three financial statements are used for the following purposes:

Accounting Conventions

Financial transactions can be recorded using either of the following two methods:

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In order to ensure consistency and uniformity in the financial statements prepared by a company
over the years and between its competitors, there are certain guidelines that must be followed by the
company while preparing the statements. These guidelines are known as accounting conventions.
Some of the major accounting conventions are as follows:

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