Finwonk
Finance from zero4 min read

The three financial statements, explained simply

The interview question

“What are the three financial statements?”

Every technical question builds on these. Before you can link the statements, you need to know what question each one answers.

The core idea

The income statement asks did we make money? The balance sheet asks what do we own and owe today? The cash flow statement asks where did the cash go?

Three questions, three statements

Picture a food truck. Over the year it sells tacos, buys ingredients, pays a cook and pays rent for its parking spot. The income statement adds that up: revenue at the top, costs taken away line by line, and net income at the bottom. It covers a period, like a season of games on a scoreboard.

The balance sheet is a photo taken on one day. It lists what the truck business owns (the truck, the cash register, ingredients in the fridge), what it owes (a loan on the truck, unpaid supplier bills), and what's left for the owner, called equity.

The cash flow statement is the cash diary. Profit and cash aren't the same thing (more on that soon), so this statement tracks the actual money in and out: from running the business, from buying or selling equipment, and from borrowing or owner investment.

Worked example
A food truck's year, top to bottom.
  1. 1Revenue $500 − ingredients $200 = $300 gross profit.
  2. 2Gross profit $300 − cook and rent $150 = $150 operating income.
  3. 3Operating income $150 − interest $20 − taxes $30 = $100 net income.
The income statement narrows from $500 of sales to $100 of profit.
Walk it through yourself
Depreciation goes up by $10tax 25%
Income statementyou are here
Net income?

Predict it: up, down, or the same?

Cash flow statement
Locked until the step above is done
Balance sheet
Locked until the step above is done
A taste of what's next: one change, traced through all three statements. Don't worry about the details yet.
Banker tip

Remember the time words: the income and cash flow statements cover a period (“for the year”); the balance sheet is as of a date (“on December 31”).

Say it like this

There are three main statements. The income statement shows revenue, expenses and profit over a period. The balance sheet shows what the company owns, what it owes and the owners' equity at a single point in time, and it always balances. The cash flow statement shows how the company's cash changed over the period, split into operating, investing and financing activities.

Traps to avoid

  • ✕Calling the balance sheet a record of the year. It's a snapshot of one day.
  • ✕Treating profit and cash as the same number.
  • ✕Forgetting that the bottom of the income statement, net income, is the profit left for the owners after interest and taxes.

What they'll ask next

›If you could see only one statement, which would you pick?

Many bankers say the cash flow statement, because cash is hardest to fake and shows whether the business really funds itself. Any answer is fine if you explain why.

›Where do public companies publish them?

In the annual report (the 10-K in the US) and quarterly reports (10-Qs).

›What's the bottom line?

Net income: profit after every expense, including interest and taxes.

Check yourself

Question 1 of 3

Which statement tells you whether a company made a profit over the year?