Tuesday, April 27, 2010

Comparing the Three Financial Statements

The three financial statements offer three different perspectives on your company's financial performance. That is, they tell three different but related stories about how well your company is doing financially.

  • The income statement shows the bottom line: it indicates how much profit or loss a company generates over a period of time—a month, a quarter, or a year.
  • The cash flow statement tells where the company's money comes from, and where it goes—in other words, the flow of cash in, through, and out of the company.
  • The balance sheet shows a company's financial position at a specific point in time. That is, it gives a snapshot of the company's financial situation—its assets, equity, and liabilities—on a given day.
Another way to understand the interrelationships is as follows:
  • The income statement tells you whether your company is making a profit.
  • The balance sheet tells you how efficiently a company is utilizing its assets and how well it is managing its liabilitiesin pursuit of profits.
  • The cash flow statement tells you whether the company is turning profits into cash.

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