Financial Statements: Overview of the Three Financial Statements

The three core financial statements are the balance sheet, income statement, and statement of cash flows. The information contained in these statements is used by investors, market analysts, and creditors to form expectations about future earnings.

The Balance Sheet

The Balance Sheet shows the financial position of the firm at a specific point in time. The balance sheet consists of three primary sections: assets, liabilities, and equity.

The assets are listed  in order of their liquidity. The liabilities are listed in order in which they must be paid.

KEY TAKEAWAYS

• A company’s balance sheet is a snapshot of its financial position at a specific point in time.
• Only cash represents actual money that can be spent. The amount that noncash assets produce if they were sold today could be higher or lower than their book values.
• The balance sheet should balance, so common stockholders’ equity or net worth, is a residual that represents the amount that stockholders would receive if all of the firm’s assets can be sold at their book values and all of the liabilities could be paid at their book values.
• The balance sheet doesn’t provide information about the company’s revenue or cash flow, so it needs to be analyzed together with other financial data to gain a full picture of the company’s financial health.

The Income Statement

The Income Statement presents the results of business operations during a specified period of time. The income statement, also known as a profit and loss (P&L) statement, summarizes revenues, expenses, net income, earnings, and loss transactions for a given period.

KEY HIGHLIGHTS

• The income statement provides valuable insights into a company’s operations, and the efficiency of its management.
• The income statement focuses on four key items: revenue, expenses, gains, and losses.
• The Income Statement is generated  using the accrual method of accounting meaning that revenues are recognized when they are earned, not when cash is received, and expenses are recognized when they are incurred not when cash is paid.

The Cash Flow Statement

The cash flow statement (also referred to as the statement of cash flows) is designed to show how the firm’s operations have affected its cash position, by examining the uses and sources of cash.

KEY TAKEAWAYS

• The cash flow statement is used in evaluating the firms’ financing
• The cash flow statement bridges the income statement and the balance sheet because it shows how money moves in and out of the business.
• The cash flow statement gives details about operating, investing, and financing activities.

The Bottom Line

The information contained in these statements is used by investors, market analysts, and creditors to evaluate a company’s financial performance and earnings potential.

These three financial statements are linked to one another. The balance sheet shows what a company owns and what it owes. The income statement shows how much money a company made and spent. The cash flow statement shows the exchange of money between a company and the outside world.

If you don’t have a financial background, there are plenty of articles in Financial Literacy section to learn about finance and build your financial knowledge.