3.3 Financial Statements

The three core statements

The income statement shows a business's revenue, expenses, and net income (profit or loss) over a period of time. The balance sheet shows what a company owns and owes at a single point in time, following the equation Assets = Liabilities + Owner's Equity. The cash flow statement tracks actual cash moving in and out through operating, investing, and financing activities.

Reading the balance sheet

Assets are things of value a business owns (cash, inventory, equipment). Liabilities are debts or obligations owed to others (loans, accounts payable). Owner's equity is the owner's claim on the business after liabilities are subtracted from assets — it represents the owner's investment plus retained earnings.

Why statements matter

Financial statements let owners, investors, and lenders evaluate a business's profitability, liquidity, and solvency. The income statement reveals if a business is making money; the balance sheet reveals financial position and stability; the cash flow statement reveals whether the business has enough cash to pay bills, even if it's profitable on paper.

Key terms

Income statement

Shows revenue, expenses, and net income (profit or loss) over a period of time.

Balance sheet

Shows assets, liabilities, and owner's equity at a single point in time; Assets = Liabilities + Owner's Equity.

Cash flow statement

Tracks actual cash moving in and out through operating, investing, and financing activities.

Assets

Things of value a business owns, such as cash, inventory, and equipment.

Liabilities

Debts or obligations a business owes to others, such as loans and accounts payable.

Try an AP-style question

The income statement shows…

1. cash in and out only
2. assets and liabilities at a moment
3. revenues and expenses over a period
4. owners' equity only