Accounting and Financial Statements
Financial statements summarize a company’s financial position and performance. The three core statements are the Balance Sheet, Income Statement (Profit & Loss), and Cash Flow Statement.
Balance Sheet
A balance sheet is a financial snapshot at a point in time. It lists all of a company’s assets (what it owns: cash, inventory, equipment) and shows how those assets are financed by liabilities (what it owes: loans, accounts payable) and shareholders’ equity (owners’ stake). The key accounting equation is:
Assets = Liabilities + Shareholders’ Equity
For example, if a startup has $10,000 in cash (asset) and owes $6,000 on a loan (liability), then the owners’ equity is $4,000. This balance must always hold: every dollar of assets is funded by debt or equity.
Income Statement
The income statement (or profit & loss statement) shows revenues and expenses over a period. It starts with total revenue (sales) and subtracts all costs and expenses – such as cost of goods sold (COGS), operating expenses, interest, and taxes – to arrive at net profit (the “bottom line”). The net profit (or loss) shows whether the business made money in that period. For example, the above statement lists a nonprofit’s revenues (donations, dues, etc.) and expenses, yielding a net income (profit) of $6,138. Essentially, (Revenue – Expenses) = Net Profit. This tells managers and investors whether the company is profitable during the period.
Cash Flow Statement
The cash flow statement reports the actual cash moving in and out of the business. It is divided into three parts: Operating Cash Flow (cash from core business activities), Investing Cash Flow (cash used for buying/selling assets like equipment), and Financing Cash Flow (cash from borrowing or equity). For example, selling products generates cash in operations, buying new equipment shows as cash outflow in investing, and taking a bank loan is cash inflow in financing. The net cash flow (bottom line) shows how the company’s cash balance changed over the period. Positive cash flow (more cash in than out) is crucial for paying bills, investing, and weathering downturns.