The 3 levels of financial reports
No ones financial statement tells the complete story. But combined, they provide very powerful information for investors. And information is the investor’s best tool when it comes to investing wisely.
Data found in the balance sheet, the income statement and the cash flow statement is used to calculate important financial ratios that provide insight into how the company’s finances are being managed and potential issues that may need to be addressed. Investors are able to make well-informed investment decisions based on what a company provides in its financial statements each period.
The balance sheet, income statement and cash flow statement provide different information on a company’s financial position, but these accounting staples are all interconnected. Let’s find out how.
A balance sheet is a financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a specific point in time.
Instead of showing individual accounting transactions, the balance sheet acts as a snapshot of the company’s accounts at the end of an accounting period. An increase or decrease in assets due to profit or loss is transferred to the balance sheet directly from a company’s income statement.
An income statement reports the level of revenue a company earned over a specific time frame as well as the expenses directly related to earning that revenue.
Any increase or decrease in assets due to profit or loss reported on the income statement is transferred to the balance sheet. And total profit or loss reported on the income statement is included in the statement of cash flow under cash flows from operations.
A Cash Flow statement reports any cash inflow or outflow over the course of the accounting period. This financial statement highlights the net increase and decrease in total cash on hand for the accounting period.
The statement is then broken down into different sections, including operating, investment and financing activities. The information in the cash flow statement explains changes shown in the numbers reported on the balance sheet, and it explains transaction level changes in net profit or loss as reported on the income statement.