Financial Statements (Balance Sheet, Income Statement, Cash Flow Statement)
Three tables showing a company's household books — what it owns (balance sheet), what it earned (income statement), and the cash that actually moved (cash flow statement).
Balance sheet: Assets = Liabilities + Equity (financial position at a point in time)
When the three statements line up with each other (profits rising while cash comes in alongside them, and debt not excessive), the picture is considered sound.
In plain terms
Financial statements are a company's household ledger. They split into three sheets: ① the balance sheet is "the assets and debts it holds right now" (a snapshot at one point in time), ② the income statement is "how much it earned and spent this quarter" (a report card for the period), and ③ the cash flow statement is "how much cash actually moved in and out."
Profit (income statement) and cash (cash flow statement) are different figures. If goods are sold on credit, profit is recorded in the books but no cash arrives in the account. That is why you need to look at all three sheets together to see the real state of the books.
What it tells you
You can see, in combination, what the company earns money from (income statement), what it owns and how much it owes (balance sheet), and whether that profit actually comes in as cash (cash flow statement).
Almost every metric — PER, ROE, debt ratio — is calculated using the numbers in these three statements. Knowing the financial statements helps you understand where the metrics come from.
Formula
Balance sheet: Assets = Liabilities + Equity (financial position at a point in time) Income statement: Revenue − Expenses = Profit (results over a period) Cash flow statement: the flow of cash that actually came in and went out
What high or low means
When the three statements line up with each other (profits rising while cash comes in alongside them, and debt not excessive), the picture is considered sound.
If profits are rising but the cash in the cash flow statement is shrinking, or debt is growing quickly, that's a sign to look behind the numbers.
The "profit" on the income statement is a figure calculated under accounting rules, so it differs from the actual bank balance. Relying on profit alone can mean missing a company whose cash is drying up.
Looking at a single quarter leaves you at the mercy of one-off events. Trends only show up across several quarters and years.
The financial statements of US companies are contained in SEC filings (10-K, 10-Q). Our service shows these filing figures as the source.
In 2002, the US telecom company WorldCom appeared on its income statement to be earning profits just fine. The trick was accounting manipulation — the network operating expenses paid out each year (a cost) were disguised as "assets" and placed on the balance sheet, inflating the profit on the income statement.
Simply shifting expenses into assets fabricated roughly $11 billion in profit, and when it came to light, WorldCom filed the largest bankruptcy in U.S. history at the time. Looking only at the profit line on the income statement, you would have been fooled — but seeing those costs piling up as assets on the balance sheet while no cash actually arrived on the cash flow statement, you would have noticed something was off. That is why the three statements need to be read side by side.
Metrics to read alongside
Guides that cover this term
See it in real stocks
Search US stocks on Stocklore to see Financial alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.