Three Financial Statements (2024)

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

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

Start Free

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

Three Financial Statements (2)

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)

FAQs

Three 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.

What are the 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 are the main types of financial statements? ›

There are four primary types of financial statements:
  • Balance sheets.
  • Income statements.
  • Cash flow statements.
  • Statements of shareholders' equity.
Nov 1, 2023

What is the basic 3 statement financial model? ›

A three-statement financial model is an integrated model that forecasts an organization's income statements, balance sheets and cash flow statements. The three core elements (income statements, balance sheets and cash flow statements) require that you gather data ahead of performing any financial modeling.

What are the three personal financial statements? ›

These financial statements are the balance sheet, income statement, and cash flow statement.

What are the 4 types of financial statements? ›

Four Types of Financial Statements
  • Income statement.
  • Balance sheet.
  • Cash flow statement.
  • Statement of retained earnings.
Nov 28, 2022

What are the 3 categories of a balance sheet? ›

A company's balance sheet is comprised of assets, liabilities, and equity. Assets represent things of value that a company owns and has in its possession, or something that will be received and can be measured objectively.

What are the 3 financial statements and how are they connected? ›

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.

What are the two most common financial statements? ›

A set of financial statements includes two essential statements: The balance sheet and the income statement. A set of financial statements is comprised of several statements, some of which are optional.

What is the 3 statement model for dummies? ›

What is a 3-Statement Model? In financial modeling, the “3 statements” refer to the Income Statement, Balance Sheet, and Cash Flow Statement. Collectively, these show you a company's revenue, expenses, cash, debt, equity, and cash flow over time, and you can use them to determine why these items have changed.

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 is the most basic financial model? ›

The three-statement model is the most basic setup for financial modeling.

Which financial statement must always be prepared first why? ›

The income statement should always be prepared before other statements because it provides an overview of the company's revenue and expenses during a specific period. This information is used in preparing other reports such as balance sheets and cash flow statements.

What are the 3 major money management activities? ›

The three major money management activities are (1) storing and maintaining financial records and documents, (2) creating personal financial statements, and (3) creating and implementing a budget.

What does a balance sheet show? ›

The balance sheet provides information on a company's resources (assets) and its sources of capital (equity and liabilities/debt). This information helps an analyst assess a company's ability to pay for its near-term operating needs, meet future debt obligations, and make distributions to owners.

What are the 3 financial statements and how do they connect? ›

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.

What are the 3 financial statements in Excel? ›

A three-statement model links the income statement, the balance sheet and the cash flow statement of a company, providing a dynamic framework to help evaluate different scenarios.

What is the difference between the balance sheet and income statement? ›

Owning vs Performing: A balance sheet reports what a company owns at a specific date. An income statement reports how a company performed during a specific period. What's Reported: A balance sheet reports assets, liabilities and equity. An income statement reports revenue and expenses.

Top Articles
Latest Posts
Article information

Author: Barbera Armstrong

Last Updated:

Views: 5877

Rating: 4.9 / 5 (79 voted)

Reviews: 86% of readers found this page helpful

Author information

Name: Barbera Armstrong

Birthday: 1992-09-12

Address: Suite 993 99852 Daugherty Causeway, Ritchiehaven, VT 49630

Phone: +5026838435397

Job: National Engineer

Hobby: Listening to music, Board games, Photography, Ice skating, LARPing, Kite flying, Rugby

Introduction: My name is Barbera Armstrong, I am a lovely, delightful, cooperative, funny, enchanting, vivacious, tender person who loves writing and wants to share my knowledge and understanding with you.