Relationship between financial statements

How do the three financial statements fit together? What is the link between the financial statements balance sheet, income statement, and cash flow statement? That is the topic of this Finance Storyteller video!

Let’s start with the opening balance sheet for the year, on January 1st. A balance sheet is a picture at a point in time of what we own and what we owe. Typical line items on the left, in the assets area, what we own, are: cash, receivables (sometimes also named accounts receivable or debtors), inventory, and fixed assets (or plant and equipment). Typical line items on the right, in the liabilities area, what we owe, are: payables (sometimes called accounts payable or creditors), accrued liabilities, debt and equity. The total monetary value of what we own on the left has to match the monetary value of what we owe on the right.

The closing balance sheet for the year, on December 31st, has the same format, but will have different numbers.

The balance sheet is a picture at a point in time, while both the income statement and the cash flow statement describe the flow of what happened during a period, in this case a full year, so the 365 days from January 1st to December 31st.

The income statement shows you how much profit a company has made during a period. If you want to close the books at the end of the period to make the balance sheet balance, you have to add that profit to an account called “retained earnings”, which is part of equity.

The cash flow statement shows you what were the sources and uses of cash during a period. When you close the books at the end of the period, the cash flow statement shows you in detail how you got from the opening cash balance to the ending cash balance. Cash was generated and used in three categories: cash from operating activities, cash from investing activities, and cash from financing activities.

So you could see both the income statement and the cash flow statement as overviews that explain important movements between two balance sheets for the same company.

Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how #financialstatements work in order to make better stock market investment decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[reallynotadatascientist]

I think it's worthwhile to mention the CF statement is connected to the income statement as well. Since virtually all firms use the indirect method, the operating activities section in the CF statement starts with the net income item found at the end of the income statement.

[manojbgm]

Legendary. Summary of complete picture of all the statements and the inter connect. This was the missing picture for since I was trying to understand accounting and finance as non finance person. Now I will be able to fully appreciate accounting and finance. Thank you 😀

[BlackPipeOSK]

Excellent presentation. Keep up the good work. Many thanks.