The three main financial statements regularly produced by publicly traded companies are the income statement, balance sheet and statement of cash flow. Both the income statement and the balance sheet are essentially statements of the company's value, although laid out from different perspectives. They also differ in that the income statement represents the company's value measured over the time period covered by the statement, usually quarterly or annually, while the balance sheet is more of a snapshot of the company's financial condition reflecting only the specific time at which the balance sheet report is produced.

The income statement, also known as the profit and loss, or P&L, statement, runs down the revenues and expenses of a company over a specified time period, showing the company's net profit for the period. All publicly traded companies are required to produce an income statement at least annually, but many firms choose to produce quarterly income statements as well. The income statement provides market analysts and investors with much of the data used to evaluate a company's financial condition, enabling them to calculate various profitability ratios such as gross, operating and net profit margin ratios. The literal “bottom line” on a company's income statement shows the company's net profit over the time period covered by the statement. Data of particular importance to investors and analysts include the company's operating margin, which is often the best indicator of how well a company is managed, and the bottom line profit, since this figure is used to determine earnings distributed to shareholders in the form of dividends.

The balance sheet provides a more basic snapshot view of a company's finances, laying out the balance of a company's assets versus liabilities and shareholders' equity at the time of the report. Assets are typically recorded on a company's balance sheet in order of liquidity; assets such as cash and inventory that can quickly be converted into cash are listed first. Other assets considered fairly liquid are accounts receivable and short-term investments. Less liquid, more long-term assets include real property and other property such as office equipment and machinery. The last assets typically listed are any intangible assets the company possesses. Company liabilities are listed in the order in which payment is due and include outstanding debt, accounts payable, taxes and any other expenses. The sum of assets, liabilities and shareholders' equity provides a shorthand look at a company's financial condition and enables market analysts and investors to evaluate the balance that exists between a company's assets and liabilities or between the company's assets and shareholders' equity, all of which factor into forecasting the company's probable future performance.

While both the income statement and the balance sheet are intended to reflect a company's current financial condition and value, the income statement provides a more detailed look at revenues versus expenses, while the balance sheet provides a more basic statement of assets versus liabilities.

  1. What is the difference between an income statement and a balance sheet?

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  2. What is the difference between a P&L statement and a balance sheet?

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  3. Which financial statements are most important when performing ratio analysis?

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  4. Which financial accounting statement contains information on a company's net sales?

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  5. How are a company's financial statements connected?

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  6. What is the difference between a cash flow statement and an income statement?

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