The Three Core Statements#

Every public company publishes three essential financial statements. Each one tells a different part of the financial story, and together they give you a complete picture of a company's health.

Think of financial statements like a three-panel story: the Income Statement shows if the company is winning, the Balance Sheet shows what resources it has, and the Cash Flow Statement shows if it has enough fuel to keep going.

1. The Income Statement#

The income statement (also called the profit and loss statement, or P&L) answers one fundamental question: Is the company making money?

It shows revenues, expenses, and profit over a period of time (usually a quarter or a year).

What It Shows	Example
Revenue (Sales)	$100 million
Costs and Expenses	$80 million
Net Income (Profit)	$20 million

Key Questions It Answers:#

How much did the company sell?
What does it cost to run the business?
Is the company profitable?
Are profits growing or shrinking?

Analogy

The income statement is like your paycheck and expense summary. It shows how much you earned, what you spent, and what's left over at the end.

2. The Balance Sheet#

The balance sheet answers: What does the company own and owe at a specific moment?

Unlike the income statement (which covers a period), the balance sheet is a snapshot of one specific date.

Category	What It Means	Example
Assets	What the company owns	$500 million
Liabilities	What the company owes	$200 million
Shareholders' Equity	Net worth (Assets - Liabilities)	$300 million

The Balance Sheet Equation#

This equation must always balance:

Assets = Liabilities + Shareholders' Equity

Key Questions It Answers:#

How much cash does the company have?
How much debt is it carrying?
What assets could be sold if needed?
Is the company financially stable?

Analogy

The balance sheet is like your personal net worth statement. It lists everything you own (house, car, savings) minus everything you owe (mortgage, loans, credit cards).

3. The Cash Flow Statement#

The cash flow statement answers: Where did cash come from and where did it go?

This is perhaps the most important statement because cash is king. A company can report profits but still run out of cash.

Section	What It Tracks
Operating Activities	Cash from running the business
Investing Activities	Cash spent on or received from investments
Financing Activities	Cash from or to investors and lenders

Key Questions It Answers:#

Is the company generating cash from operations?
How much is it investing in growth?
Is it paying off debt or taking on more?
Can it afford to pay dividends?

Why Cash Matters

Companies can manipulate reported profits through accounting choices. But cash is harder to fake—either you have it or you don't.

How The Three Statements Connect#

The statements aren't independent—they link together like puzzle pieces:

Income Statement          Balance Sheet           Cash Flow Statement
     |                         |                        |
Net Income ─────────────> Retained Earnings            |
     |                         |                        |
     └──────────────────> Starting Point ─────> Adjustments to Cash
                              |                        |
                          Cash Balance <────────── Ending Cash

Specific Connections:#

Net income from the income statement flows into retained earnings on the balance sheet
Net income is the starting point for the cash flow statement (operating section)
Ending cash from the cash flow statement matches the cash balance on the balance sheet
Debt changes on the balance sheet appear in the financing section of cash flow

When analyzing a company, always look at all three statements. A company might show profits on the income statement but have dangerously low cash. Or it might have lots of assets on the balance sheet but struggle to generate cash flow.

The Complete Picture#

Statement	Time Frame	Primary Focus
Income Statement	Period (quarter/year)	Profitability
Balance Sheet	Point in time	Financial position
Cash Flow Statement	Period (quarter/year)	Liquidity and cash

Together, these three statements tell you:

Is the company profitable? (Income Statement)
Is the company stable? (Balance Sheet)
Is the company generating real cash? (Cash Flow Statement)

A Quick Example#

Imagine Company XYZ reports:

Statement	Key Finding
Income Statement	$50M net income (looks great!)
Balance Sheet	$400M in debt, only $10M cash (concerning...)
Cash Flow	Negative $20M from operations (red flag!)

This company is profitable on paper, but it's burning through cash and has significant debt. Looking at only one statement would give you an incomplete picture.

Key Takeaways

The Income Statement shows profitability over a period
The Balance Sheet shows financial position at a point in time
The Cash Flow Statement tracks where cash comes from and goes
All three statements are connected and should be analyzed together
Cash flow is often the most important indicator of financial health
Never make investment decisions based on just one statement