A:

The information found on the financial statements of an organization is the foundation of corporate accounting. This data is reviewed by investors and lenders for the purpose of assessing the company's level of financial stability. Data found in the balance sheet, the income statement and the cash flow statement is used to calculate important financial ratios that provide insight into how the company's finances are being managed and potential issues that may need to be addressed. Investors are able to make well-informed investment decisions based on what a company provides in its financial statements each period. The balance sheet, income statement and cash flow statement provide different information on a company's financial position, but these accounting staples are all interconnected.

The Balance Sheet

Also referred to as the statement of financial position, a company's balance sheet provides information on what the company is worth. The balance sheet reports the totals of a company's assets, liabilities and shareholders' equity on a specific date, and it mimics the accounting equation expressed as assets = liabilities + shareholders' equity. An asset of a company can only be obtained through shareholders' equity or by taking on a liability, such as a bank loan or line of credit, so the balance sheet reflects the direct relationship between these transactions. Instead of showing individual accounting transactions, the balance sheet acts as a snapshot of the company's accounts at the end of an accounting period. An increase or decrease in assets due to profit or loss is transferred to the balance sheet directly from a company's income statement.

The Income Statement

A company's income statement reports the level of revenue a company earned over a specific time frame as well as the expenses directly related to earning that revenue. Companies first list gross revenue from product or service sales, and then subtract any money not expected to be collected on specific sales due to returns or sales discounts. This results in the company's net revenue. All expenses related to the cost of sales are subtracted from net revenue to reach gross profit. All operating expenses are then deducted from that total, resulting in operating profit before interest and income tax expenses. Net earnings or losses are listed as the bottom line of the income statement after expenses for interest and taxes are deducted. Any increase or decrease in assets due to profit or loss reported on the income statement is transferred to the balance sheet, and total profit or loss reported on the income statement is included in the statement of cash flow under cash flows from operations.

The Cash Flow Statement

The cash flow statement reports any cash inflow or outflow over the course of the accounting period. This financial statement highlights the net increase and decrease in total cash on hand for the accounting period. The cash flow statement is broken down into different sections, including operating, investment and financing activities. The information in the cash flow statement explains changes shown in the numbers reported on the balance sheet, and it explains transaction level changes in net profit or loss as reported on the income statement.

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

    The balance sheet illustrates a company’s book value, and the income statement shows how assets and liabilities are used. Read Answer >>
  2. Which financial accounting statement contains information on a company's net sales?

    Find out which accounting statement contains information on a company's net sales as well as other key statements analysts ... Read Answer >>
  3. Which financial statements are most important when performing ratio analysis?

    Learn which financial statements are used for ratio analysis. Find out what financial data is needed to conduct fundamental ... Read Answer >>
  4. What kind of financial reporting requirements does GAAP set out?

    Look at some of the major financial reporting requirements set forth by the generally accepted accounting principles and ... Read Answer >>
  5. What is the purpose of drawing up a cash flow statement?

    Understand the reasons behind why a company draws up a cash flow statement. Learn how it is used to understand the trends ... Read Answer >>
  6. How are a company's financial statements connected?

    When you do research on different companies by looking at their annual reports, you will typically come across two separate ... Read Answer >>
Related Articles
  1. Investing

    What Is The Difference Between A Cash Flow Statement And An Income Statement?

    A firm’s cash flow statement measures the sources and uses of its cash. The income statement shows how it is financially performing.
  2. Investing

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  3. Investing

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  4. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  5. Investing

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  6. Investing

    Cash Flow Statement: Analyzing Cash Flow From Financing Activities

    The financing activity in the cash flow statement measures the flow of cash between a firm and its owners and creditors.
  7. Investing

    What Is a Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.
  8. Investing

    Comparing the P&L Statement and the Balance Sheet

    Basically, the balance sheet shows how much a company is worth, while the P&L statement reveals if a company is profitable or not.
RELATED TERMS
  1. Financial Statements

    Records that outline the financial activities of a business, ...
  2. Financial Statement Analysis

    The process of reviewing and evaluating a company's financial ...
  3. Comparative Statement

    A statement which compares financial data from different periods ...
  4. Common Size Financial Statement

    A company financial statement that displays all items as percentages ...
  5. Income Statement

    A financial statement that measures a company's financial performance ...
  6. Common Size Income Statement

    An income statement in which each account is expressed as a percentage ...
Hot Definitions
  1. Collateral

    Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan ...
  2. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
  3. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  4. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  5. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  6. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
Trading Center