Finance Basics: 3 Basic Financial Statement (B)
What are 3 Basic Financial Statements? What is the connection between Balance Sheet, Cash Flow Statement and Profit & Loss Statement?
Posted: Apr 2009
There are 3 basic finance documents that describe the financial traffic of the company:
Profit & Loss statement
Cash Flow statement
THE FINANCIAL TRIANGLE
Like the three angles of a triangle, the three basic financial statements are integrally linked to each other.
If you change any item in one of the financial statements, one or both of the remaining statements must change as well.
THE BALANCE SHEET
A Balance Sheet provides a snapshot of a company's situation at a particular point in time.
The 'snapshot' may be taken:
• at the end of the year (or financial year),
• at the end of every quarter,
• each month
• at any other given moment.
It is useful to compare two balance sheets to see the changes between them.
Assets ( left side of the Balance Sheet )
• what a company owns, eg. equipment, cash, money due from customers, inventories.
• represent the company's use of funds, ie. what it has done with the money it has received.
Liabilities ( right side of the Balance Sheet )
• what the company owes, eg. to the shareholders, to the bank and to suppliers.
• show the company's sources of funds, ie. where the money for the business has come from
PROFIT & LOSS STATEMENT
Shows the results achieved by a company over a period of time.
The Profit & Loss Statement answers the question:
"Did the company make or lose money during this period?"
CASH FLOW STATEMENT
Records the movement of money.
It shows the money coming into and going out of a company during the period between two balance sheets
A BIG PICTURE
A full picture of a company's finances can only be gained from comparing at least two balance sheets and what has happened during the time in between them.
Together, the three statements provide information about a company, each from a different viewpoint.