Complete Guide To Corporate Finance

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Cash Flow And Relationships Between Financial Statement - The Relationship Between Financial Statements

The income statement, balance sheet and cash flow statement are all interrelated. The income statement describes how the assets and liabilities were used in the stated accounting period. The cash flow statement explains cash inflows and outflows, and it will ultimately reveal the amount of cash the company has on hand, which is also reported in the balance sheet. By themselves, each financial statement only provides a portion of the story of a company's financial condition; together, they provide a more complete picture.

The Relationship Between the Financial Statements



Stockholders and potential creditors analyze a company's financial statements and calculate a number of financial ratios with the data they contain to identify the company's financial strengths and weaknesses and determine whether the company is a good investment/credit risk. Managers use them to aid in decision making. (To learn more, check out Reading The Balance Sheet, Understanding The Income Statement and The Essentials Of Cash Flow.)

One important way the financial statements are used together is in the calculation of free cash flow (FCF). Smart investors love companies that produce plenty of free cash flow. It signals a company's ability to pay debt and dividends, buy back stock and facilitate the growth of business - all important undertakings from an investor's perspective. However, while free cash flow is a great gauge of corporate health, it does have its limits and is not immune to accounting trickery. (For background reading, see Analyzing Cash Flow The Easy Way.)

Free Cash Flow
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