Every business should know three financial statements
Every business should know and understand the three primary financial statements: the income statement, the balance sheet, and the statement of cash flows. Together, these reports offer a complete and accurate picture of a company’s financial health, performance, and cash movements.
1. Income statement
Also known as the profit and loss (P&L) statement, this report summarizes revenues and expenses over a specific period, detailing how effectively a company converts sales into profit. Its key purpose is to show the profitability of a business. Key components include revenue, cost of goods sold, operating expenses, and net income, following the formula: Revenue – Expenses = Net Income.
2. Balance sheet
The balance sheet presents a company’s financial position at a single point in time, based on the accounting equation. It shows what a company owns (assets), what it owes (liabilities), and the owners’ investment (equity). Its key purpose is to demonstrate a company’s financial position and stability. The formula is: Assets = Liabilities + Equity.
3. Statement of cash flows
This statement tracks the movement of cash into and out of a business over a period, providing insight into its liquidity and ability to fund growth. The key purpose is to show how a company generates and spends cash. It is divided into three sections: operating, investing, and financing activities.
How the three statements work together
These statements are interconnected and provide a comprehensive view when analyzed together. For example, net income from the income statement impacts cash flow and balance sheet equity. This integrated analysis helps stakeholders understand the company’s financial health.
