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

Related Articles
  1. Investing

    Corporate Cash Flow: Understanding the Essentials

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself. Learn how to read the cash flow statement.
  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

    Analyze cash flow the easy way

    Learn the key components of the cash flow statement, how to analyze and interpret changes in cash, and what improved free cash flow means to shareholders.
  4. 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.
  5. Investing

    12 things you need to know about financial statements

    Before investing, discover 12 characteristics of financial statements that can help you evaluate companies and increase your chances of choosing a winner.
  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

    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.
  8. Investing

    Free Cash Flow Yield: The Best Fundamental Indicator

    Cash in the bank is what every company strives to achieve. Find out how to determine how much a company is generating and keeping.
Frequently Asked Questions
  1. Can I have a self-directed IRA or Roth IRA using the forex market?

    Individuals who own self-directed IRAs or and Roth IRAs can trade in the forex market, but they must open a special account. ...
  2. Do I have to complete all exams within a certain period of time to receive the CFA charter?

    According to the CFA Institute, a candidate can take as much time as necessary to complete all three levels of the CFA program.
  3. How Are Operating Expenses Different From SG&A?

    Operating expenses and selling, general, and administrative expenses are typically synonymous with each other. However, there ...
  4. What is high-frequency trading?

    High-frequency trading is an automated trading platform that utilizes powerful computers to transact a large number of orders ...
Trading Center