The three financial statements
Income statement, balance sheet, cash flow — and what each is for.
- Income statement = performance over time; balance sheet = position at a point in time.
- Assets = liabilities + equity, with no exceptions.
- The cash flow statement translates accrual profit into actual cash.
Income statement
A record of performance over a period. Revenue at the top, then costs, ending at net income. It is accrual-based: revenue is booked when earned, not when cash arrives.
Key lines in order: Revenue → Gross profit → EBITDA → EBIT (operating income) → Pre-tax income → Net income.
Balance sheet
A snapshot at one moment. Assets = Liabilities + Shareholders' equity, always.
Assets are what the company controls, liabilities are claims by lenders and suppliers, and equity is what is left for owners.
Cash flow statement
The bridge from accrual accounting back to cash. It starts at net income, adds back non-cash items like depreciation, adjusts for working capital, then covers investing and financing.
Profit is an opinion; cash is a fact. The cash flow statement exists because the two differ.
Apply the lesson to explain income statement, balance sheet, cash flow — and what each is for. Start with the answer, show the bridge, and sanity-check the direction before stopping.
- 1Lead with the definition or conclusion for the three financial statements.
- 2Show the mechanics in a fixed sequence and state every assumption.
- 3Finish with the practical implication, risk, or reason the result matters.
Which statement would you use to see whether a company can pay next month's bills?
A company books $10M of revenue on credit. What happens immediately?
- Income statement = performance over time; balance sheet = position at a point in time.
- Assets = liabilities + equity, with no exceptions.
- The cash flow statement translates accrual profit into actual cash.