Req 2a — Financial Statements

The Three Financial Statements

Financial statements are like a business’s report card. They show how much money is coming in, how much is going out, what the business owns, and what it owes. Every business — from a lemonade stand to a tech giant — uses these three statements to understand its financial health.

Think of each statement as answering a different question:

• Income Statement: “Are we making money?”
• Balance Sheet: “What do we own, and what do we owe?”
• Cash Flow Statement: “Where is our cash actually going?”

The Income Statement

The income statement — sometimes called the profit and loss statement (or P&L) — shows whether a business made or lost money over a specific period of time (a month, a quarter, or a year).

It follows a simple formula:

Revenue − Expenses = Net Income (Profit or Loss)

• Revenue is the total money earned from selling products or services.
• Expenses are the costs of running the business — rent, salaries, materials, utilities, marketing, and more.
• Net Income is what is left after all expenses are subtracted. If revenue is greater than expenses, the business made a profit. If expenses are greater, the business had a loss.

How it helps leaders decide: If a product line is losing money, the income statement reveals it. If expenses are climbing faster than revenue, leaders can see the trend and take action — cut costs, raise prices, or shift focus to more profitable products.

The Balance Sheet

The balance sheet is a snapshot of everything a business owns and owes at a single moment in time. It answers the question: “If we added up everything we own and subtracted everything we owe, what would be left?”

It follows this formula:

Assets = Liabilities + Equity

• Assets are everything the business owns — cash, equipment, inventory, buildings, and accounts receivable (money customers owe).
• Liabilities are everything the business owes — loans, unpaid bills, and other debts.
• Equity (also called owner’s equity or shareholders’ equity) is what is left after liabilities are subtracted from assets. It represents the owners’ stake in the business.

How it helps leaders decide: The balance sheet reveals whether a business has enough assets to cover its debts. A company with too much debt relative to its assets may struggle to survive a downturn. A company with strong equity is in a better position to invest and grow.

The Statement of Cash Flows

The cash flow statement tracks the actual movement of cash into and out of the business over a period of time. This might sound like the income statement, but there is an important difference: a business can be profitable on paper and still run out of cash.

How? Imagine you sell $10,000 worth of products, but your customers have not paid yet. Your income statement shows $10,000 in revenue, but your bank account is empty. The cash flow statement catches this.

Cash flows are divided into three categories:

• Operating activities — Cash from day-to-day business operations (selling products, paying employees and suppliers)
• Investing activities — Cash spent on or earned from buying or selling long-term assets like equipment or property
• Financing activities — Cash from borrowing money, repaying loans, or receiving investments from owners

How it helps leaders decide: The cash flow statement shows whether the business can actually pay its bills right now — not in theory, but in reality. A business with strong profits but weak cash flow is in danger. Leaders use this statement to time purchases, manage debt, and ensure they always have enough cash on hand.

Why All Three Matter Together

No single statement tells the full story. Smart business leaders look at all three together:

A business might show a profit on the income statement but be running dangerously low on cash. Or it might have lots of cash but be losing money each month. Only by reading all three can a leader get the complete picture.

Now that you can read a business’s financial scoreboard, let’s explore the outside forces that affect how money moves.