The three financial statements are: (1) the Income Statement, (2) the Balance Sheet, and (3) the Cash Flow Statement. These three core statements are intricately linked to each other.

Income statement

Often, the first place an investor or analyst will look is the income statement. The income statement shows the performance of the business throughout each period, displaying sales revenue at the very top. The statement then deducts the cost of goods sold (COGS) to find gross profit. From there, the gross profit is affected by other operating expenses and income, depending on the nature of the business, to reach net income at the bottom – “the bottom line” for the business.

Key features:

  • Shows the revenues and expenses of a business
  • Expressed over a period of time (i.e., 1 year, 1 quarter, Year-to-Date, etc.)
  • Uses accounting principles such as matching and accruals to represent figures (not presented on a cash basis)
  • Used to assess profitability

Balance sheet

The balance sheet displays the company’s assets, liabilities, and shareholders’ equity. As commonly known, assets must equal liabilities plus equity. The asset section begins with cash and equivalents, which should equal the balance found at the end of the cash flow statement. The balance sheet then displays the changes in each major account. Net income from the income statement flows into the balance sheet as a change in retained earnings (adjusted for payment of dividends).

Key features:

  • Shows the financial position of a business
  • Expressed as a “snapshot” or financial picture of the company at a specified point in time (i.e., as of December 12, 2017)
  • Has three sections: assets, liabilities, and shareholders equity
  • Assets = Liabilities + Shareholders Equity

Cash flow statement

The cash flow statement then takes net income and adjusts it for any non-cash expenses. Then, using changes in the balance sheet, usage and receipt of cash is found. The cash flow statement displays the change in cash per period, as well as the beginning balance and ending balance of cash.

Key features:

  • Shows the increases and decreases in cash
  • Expressed over a period of time, an accounting period (i.e., 1 year, 1 quarter, Year-to-Date, etc.)
  • Undoes all accounting principles to show pure cash movements
  • Has three sections: cash from operations, cash used in investing, and cash from financing
  • Shows the net change in the cash balance from start to end of the period
3 financial accounting statements
The 3 statements are intricately linked

Summary comparison

 Income StatementBalance SheetCash Flow
TimePeriod of timeA point in timePeriod of time
PurposeProfitabilityFinancial positionCash movements
MeasuresRevenue, expenses, profitabilityAssets, liabilities, shareholders’ equityIncreases and decreases in cash
Starting PointRevenueCash balanceNet income
Ending PointNet incomeRetained earningsCash balance