The three financial statements are the income statement, the balance sheet and the cash flow statement Show
What are the Three Financial Statements?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 and this guide will explain how they all fit together. By following the steps below, you’ll be able to connect the three statements on your own. Key HighlightsThe three core financial statements are 1) the income statement, 2) the balance sheet, and 3) the cash flow statement. These three financial statements are intricately linked to one another. Analyzing these three financial statements is one of the key steps when creating a financial model. Overview of the Three Financial Statements1. Income StatementOften, 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, gross profit is impacted 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:
2. Balance SheetThe balance sheet displays the company’s assets, liabilities, and shareholders’ equity at a point in time. The two sides of the balance sheet must balance: 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 ending balance in each major account from period to period. Net income from the income statement flows into the balance sheet as a change in retained earnings (adjusted for payment of dividends). Key features:
3. Cash Flow StatementThe cash flow statement then takes net income and adjusts it for any non-cash expenses. Then cash inflows and outflows are calculated using changes in the balance sheet. The cash flow statement displays the change in cash per period, as well as the beginning and ending balance of cash. Key features:
Summary Comparison
How are These 3 Core Statements Used in Financial Modeling?As explained above, each of the three financial statements has an interplay of information. Financial models use the trends in the relationship of information within these statements, as well as the trend between periods in historical data to forecast future performance. The preparation and presentation of this information can become quite complicated. In general, however, the following steps are followed to create a financial model.
More ResourcesWe hope this has been a helpful overview for you of the 3 financial statements. Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. To continue learning, explore these additional CFI resources:
How would an investor use the statement of cash flows?Investors consider the cash flow statement as a valuable measure of profitability and the long-term future outlook of an entity. It can help to evaluate whether the company has enough cash to pay its expenses. In other words, a CFS reflects a company's financial health.
Does statement of cash flow measure profitability?People often mistakenly believe that a cash flow statement will show the profitability of a business or project. Although closely related, cash flow and profitability are different. Cash flow represents the cash inflows and outflows from the business.
Why is the statement of cash flows important in evaluating a firm's performance?The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. The income statement, on the other hand, often includes noncash revenues or expenses, which the statement of cash flows excludes.
Should an investor focus on profit or cash flow?A steady, positive cash flow that is invested to expand your business is a far superior strategy than simply hanging on to small profits. Instead, growth due to continual cash flow can lead to heavy profits in future. It's a sign of the long-term prosperity of the organization.
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