Three Financial Statements (2024)

The three financial statements are the income statement, the balance sheet, and the cash flow statement

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What are the Three Financial Statements?

The three financial statements are: (1) the income statement, (2) the balance sheet, and (3) the cash flow statement. Each of the financial statements provides important financial information for both internal and external stakeholders of a company.

The income statement illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company’s assets, liabilities, and shareholders’ equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.

These three core statements are intricately linked to each other and this guide will explain how they all fit together. By following the steps below, you’ll be able to connect the three statements on your own.

Three Financial Statements (1)

Key Highlights

  • The three core financial statements are 1) the income statement, 2) the balance sheet, and 3) the cash flow statement.
  • These three financial statements are intricately linked to one another.
  • Analyzing these three financial statements is one of the key steps when creating a financial model.

Overview of the Three Financial Statements

1. Income statement

Often, the first place an investor or analyst will look is the income statement. Theincome statementshows the performance of the business throughout each period, displayingsales revenueat the very top. The statement then deducts the cost of goods sold (COGS) to findgross profit.

From there, gross profit is impacted by other operating expenses and income, depending on the nature of the business, to reachnet income at the bottom — “the bottom line” for the business.

Key features:

  • Shows the revenues and expenses of a business
  • Expressed over a period of time (i.e., 1 year, 1 quarter, year-to-date, etc.)
  • Uses accounting principles such asmatchingandaccrualsto represent figures (not presented on a cash basis)
  • Used to assess profitability

2. Balance sheet

The balance sheet displays the company’s assets, liabilities, andshareholders’ equityat a point in time. The two sides of the balance sheet must balance: assets must equal liabilities plus equity. The asset section begins withcash and equivalents, which should equal the balance found at the end of the cash flow statement.

The balance sheet then displays the ending balance in each major account from period to period. Net income from the income statement flows into the balance sheet as a change inretained earnings(adjusted for payment ofdividends).

Key features:

  • Shows the financial position of a business
  • Expressed as a “snapshot” or financial picture of the company at a specified point in time (i.e., as of December 31, 2017)
  • Has three sections: assets, liabilities, and shareholders equity
  • Assets = Liabilities + Shareholders Equity

3. Cash flow statement

The cash flow statement then takes net income and adjusts it for any non-cash expenses. Then cash inflows and outflows are calculated using changes in the balance sheet. The cash flow statement displays the change in cash per period, as well as the beginning and ending balance of cash.

Key features:

  • Shows the increases and decreases in cash
  • Expressed over a period of time (i.e., 1 year, 1 quarter, year-to-date, etc.)
  • Undoes accrual accounting principles to show pure cash movements
  • Has three sections: cash from operations, cash used in investing and cash from financing
  • Shows the net change in the cash balance from the start to the end of the period

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Summary Comparison of the Three Financial Statements

Income StatementBalance SheetCash Flow
TimePeriod of timeA point in timePeriod of time
PurposeProfitabilityFinancial positionCash movements
MeasuresRevenue, expenses, profitabilityAssets, liabilities, shareholders' equityIncreases and decreases in cash
Starting PointRevenueCash balanceNet income
Ending PointNet incomeRetained earningsCash balance

How are These 3 Core Statements Used in Financial Modeling?

Each of the three financial statements has an interplay of information. Financial modelsuse the trends in the relationship of information within these statements, as well as the trend between periods in historical data to forecast future performance.

The preparation and presentation of this information can become quite complicated. In general, however, the following steps are followed to create a financial model.

  • Line items for each of the core statements are created. It provides the overall format and skeleton that the financial model will follow
  • Historical numbers are placed in each of the line items
  • At this point, the creator of the model will often check to make sure that each of the core statements reconciles with the data in the other. For example, the ending balance of cash calculated in the cash flow statement must equal the cash account in the balance sheet
  • An assumptions section is prepared within the sheet to analyze the trend in each line item of the core statements between periods
  • Assumptions from existing historical data are then used to create forecasted assumptions for the same line items
  • The forecasted section of each core statement will use the forecasted assumptions to populate values for each line item. Since the analyst or user has analyzed past trends in creating the forecasted assumptions, the populated values should follow historical trends
  • Supporting schedules are used to calculate more complex line items. For example, thedebt scheduleis used to calculate interest expense and the balance of debt items. Thedepreciation and amortization scheduleis used to calculate depreciation expense and the balance of long-term fixed assets. These values will flow into the three main statements

Additional Resources

Free Reading Financial Statements Course

Free Financial Modeling Guide

How to Link the 3 Statements

See all accounting resources

Three Financial Statements (2024)


Three Financial Statements? ›

The three primary financial statements are the income statement, cash flow statement, and balance sheet. Together, they present a comprehensive overview of a company's financial status.

What questions do the three main financial statements answer? ›

The income statement illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company's assets, liabilities, and shareholders' equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.

How to answer how are the three financial statements linked? ›

Net income from the bottom of the income statement links to the balance sheet and cash flow statement. On the balance sheet, it feeds into retained earnings and on the cash flow statement, it is the starting point for the cash from operations section.

What are the three 3 most common financial statements? ›

The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.

Why do you need all 3 financial statements? ›

The balance sheet, income statement, and cash flow statement each offer unique details with information that is all interconnected. Together the three statements give a comprehensive portrayal of the company's operating activities.

What is common in all three financial statements? ›

The concept of retained earnings is the centerpiece that links the three financial statements together. The retained earnings balance in the current period is equal to the prior period's retained earnings balance plus net income minus any dividends issued to shareholders in the current period.

What are the 3 financial statements and what do they mean? ›

The income statement, balance sheet, and cash flow all connect to create the three-statement model. How? Changes in current assets and liabilities on the balance sheet are reflected in the revenues and expenses that you see on the income statement.

Which 2 of the 3 financial statements is most important? ›

Another way of looking at the question is which two statements provide the most information? In that case, the best selection is the income statement and balance sheet, since the statement of cash flows can be constructed from these two documents.

Which of the 3 financial statement should be prepared first? ›

Income statement: This is the first financial statement prepared. The income statement is prepared to look at a company's revenues and expenses over a certain period, such as a month, a quarter, or a year.

What are the 3 financial statements in Excel? ›

The P&L, Balance sheet, and Cash flow statements are three interrelated parts. The P&L feeds net income on the liabilities and equity side of the Balance sheet. At the same time, we obtain Cash (an asset) by summing the bottom-line result of the Cash flow statement with previous year cash.

What are the golden rules of accounting? ›

The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out. These rules are the basis of double-entry accounting, first attributed to Luca Pacioli.

Which financial statement is most important to CEO? ›

The cash flow statement accounts for the money flowing into and out of a business over a specified period of time. The cash flow statement is arguably the most important of these financial reports because it reveals a business's actual ability to operate.

What is the 3 statement model? ›

What is a 3-Statement Model? The 3-Statement Model is an integrated model used to forecast the income statement, balance sheet, and cash flow statement of a company for purposes of projecting its forward-looking financial performance.

What type of questions do the financial statements help to answer? ›

It answers several other questions like is the present cash flow enough to serve the principal payments and interest to cover the borrowing needs of the company? Should the current investments be liquidated? Would the investments put in place bring forth good returns?

What are the three 3 main components of the statement of financial position describe each component? ›

The three main components of the statement of financial position are assets, liabilities, and equity, which are broken down into various categories. However, the way in which the statement is presented varies from company to company, depending on the types of assets, liabilities, and equity they have.

What is the most important financial statement interview question? ›

You could say that not only is the cash flow statement the most widely accepted in various settings, but it's better than the income statement or balance sheet because they give a misleading understanding of profitability.

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