Three Financial Statements

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

Written by CFI Team

Updated July 14, 2022
Reviewed by Jeff Schmidt

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. 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.
 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. The income
statement shows the performance of the business throughout each period, displaying sales
revenue at the very top. The statement then deducts the cost of goods sold (COGS) to find gross
profit.

From there, gross profit is impacted by other operating expenses and income, depending on the
nature of the business, to reach net 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 as matching and accruals to represent figures (not presented on

a cash basis)

Used to assess profitability

2. Balance Sheet

The balance sheet displays the company’s assets, liabilities, and shareholders’ equity at a point in
time. The two sides of the balance sheet must balance: assets must equal liabilities plus equity. The
asset section begins with cash 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 in retained
earnings (adjusted for payment of dividends).

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
Summary Comparison

Income Statement Balance Sheet Cash Flow

Time Period of time A point in time Period of time

Purpose Profitability Financial position Cash movements

Measures Revenue, expenses, Assets, liabilities, Increases and decreases

profitability shareholders' equity in cash

Starting Revenue Cash balance Net income

Point

Ending Net income Retained earnings Cash balance

Point

How are These 3 Core Statements Used in Financial Modeling?

As explained above, each of the three financial statements has an interplay of information. 
Financial models use 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, the debt
schedule is used to calculate interest expense and the balance of debt items. The 
depreciation and amortization schedule is used to calculate depreciation expense and the
balance of long-term fixed assets. These values will flow into the three main statements.

More Resources
We hope this has been a helpful overview for you of the 3 financial statements. Through financial
modeling courses, training, and exercises, anyone in the world can become a great analyst. To
continue learning, explore these additional CFI resources:

Free Reading Financial Statements Course

How to Link the 3 Statements

What is Financial Modeling

Financial Modeling Best Practices

Interactive Career Map