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. How do the income statement and balance sheet differ?

    The balance sheet shows a company’s total value while the income statement shows whether a company is generating a profit ... Read Answer >>
  2. How do net income and operating cash flow differ?

    Net income is the profit a company has earned for a period while cash flow from operating activities measures, in part, the ... Read Answer >>
  3. Do tax liabilities appear in the financial statements?

    Taxes appear in some form in all three of the major financial statements: the balance sheet, the income statement and the ... Read Answer >>
  4. What kind of financial reporting requirements does GAAP set out?

    There are three major financial statements required under GAAP: the income statement, the balance sheet and the cash flow ... Read Answer >>
  5. 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 >>
  6. What is the difference between a compiled and a certified financial statement?

    All publicly-traded companies are required to provide financial statements, including a balance sheet, cash flow statement ... Read Answer >>
Related Articles
  1. 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 ...
  2. 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.
  3. Investing

    Reading the Balance Sheet

    Learn about the components of a company balance sheet - aka the statement of financial position - and how it relates to other financial statements.
  4. Investing

    Evaluating Your Personal Financial Statement

    Determine your net worth by making your own cash flow statement and balance sheet.
  5. Investing

    Cash flow statement: Analyzing cash flow from investing activities

    Here, you'll find an overview of cash flow from investing activities — one of three primary categories in the statement of cash flows.
  6. Investing

    What Is Cash Flow From Investing Activities?

    Cash flow from investing is listed on a company's cash flow statement and includes any inflows or outflows of cash from a company's long-term investments. 
  7. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  8. Insights

    Navigating Government and Nonprofit Financials

    Examining government & nonprofit financials can help you trace where your dollars are really going.
RELATED TERMS
  1. Financial Statements

    Financial statements are written records that convey the financial ...
  2. Financial Performance

    Financial performance is a subjective measure of how well a firm ...
  3. Comparative Statement

    A comparative statement is a document that compares a particular ...
  4. Income Statement

    An income statement is one of the three major financial statements ...
  5. Cash Flow From Investing Activities

    Cash flow from investing activities reports the total change ...
  6. Cash Flow Statement

    A cash flow statement is a financial statement that provides ...
Trading Center