Beginner4 min readFundamental Analysis and Financial Statements · 2/15
The Three Financial Statements and How They Connect
Every listed company publishes financial statements, and three of them are the ones used most in analysis. Each shows part of the story, and their real value appears when you see the numbers pass from one statement to the next.
What you will learn
Know which question each of the three statements answers.
Follow net profit as it passes between the statements.
See why profit and cash in the bank are not the same number.
The lesson as a short video · 20 seconds · Watch on YouTubeIn this lesson
Income statementShows whether the company earned or lost money over a period, a year or a quarter: revenue minus all expenses.
Balance sheetA snapshot on one date: what the company owns (assets), what it owes (liabilities), and what is left for shareholders.
Cash flow statementTracks the actual cash that came in and went out over the same period, and from which activity.
The income and cash flow statements cover a period. The balance sheet covers a single moment, the last day of that period. That is why the balance sheet carries one date, while the other two say "for the year ended".
Numbers pass from one statement to another
ExampleThe invented company Al Wadi Foods made a net profit of EGP 93 million this year and paid 10 million of it to shareholders. The remaining 83 million is added to retained earnings inside equity on the balance sheet. If the cash flow statement uses the indirect method, its operating section starts from the same 93 million and adjusts it, and the statement ends with cash of 80 million, exactly the cash figure on the balance sheet.
Income statementDid we earn or lose this year?
Net profit93
▼ Profit flows into the other two
Cash flow statementWhere did cash come from and go?
Starts from net profit (indirect)93
Cash at year end80
Balance sheetWhat does it own and owe?
Cash80
Rise in retained earnings93 − 10 = 83
Figures in EGP millions, invented company.
Net profit feeds retained earnings and, under the indirect method, is where the cash flow statement starts; cash ties the cash flow statement to the balance sheet.
Why read all three together
Each statement alone can give an incomplete picture. A company can book a large profit on the income statement while little cash actually came in, because customers have not paid yet. That shows in the cash flow statement, not the income statement. Another may have a reasonable profit but heavy debt on the balance sheet, which the income statement will not spell out.
Watch outNet profit is not money in the till. Profit is recorded when a sale happens, even if the cash arrives later. So a company can be profitable and still see its cash fall in the same year.
This lesson focuses on the three statements used most in analysis, but the complete set of financial statements also includes the statement of comprehensive income and the statement of changes in equity, together with the notes: the pages after the statements that explain how the figures were built, which you should not skip. The next lessons read each statement separately, starting with the income statement.
See real statements
The disclosure archive holds the financial statements listed companies have published. Open one and find the three statements.