In the booming stock market of the 1920s, investors were largely in the dark when choosing where to invest—companies weren’t legally required to share their financial information. This lack of transparency played a key role in the devastating market crash 1929. In response, the government introduced new laws to protect investors and bring accountability to the markets. These reforms, still in effect today, require publicly traded companies to regularly disclose important information about their financial health and operations.
What Are the Three Financial Statements?
The three key financial statements are:
- The income statement
- The balance sheet
- The cash flow statement
Each of these provides crucial financial insights for both internal and external stakeholders of a business.
The income statement reflects a company’s profitability over a period, based on accrual accounting principles. The balance sheet presents the company’s assets, liabilities, and shareholders’ equity at a specific point in time. The cash flow statement outlines the actual cash movements resulting from operating, investing, and financing activities.
These three financial statements are closely interconnected. This guide will help you understand how they work together and show you how to link them step by step.
Top 5 Overview of the Three Financial Statements
Understanding financial statements is critical for anyone involved in business—whether you’re a startup founder, investor, accountant, or student. These documents give you a complete view of a company’s financial performance, position, and cash health.
In this guide, we’ll cover the three primary financial statements—the Income Statement, Balance Sheet, and Cash Flow Statement—plus two important supporting sections: Notes to Financial Statements and the Statement of Changes in Equity.
1. The Cash Flow Statement
The cash flow statement shows how cash enters and leaves a business during a given time period. While the income statement might show profit on paper, this report reveals whether the business actually has cash in hand to pay bills, invest, or grow.
Key Features:
Example:
| Activity Type |
Transaction |
Cash Flow |
| Operating |
Received $15,000 from customers |
+$15,000 |
| Operating |
Paid $5,000 in supplier bills |
-$5,000 |
| Investing |
Bought new laptop for $1,500 |
-$1,500 |
| Financing |
Repaid part of a bank loan ($2,000) |
-$2,000 |
Net Cash Flow = $15,000 – $5,000 – $1,500 – $2,000 = $6,500
Why It Matters Cash Flow Statement
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Shows if your business can survive in the short term
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Investors and lenders use it to evaluate liquidity and risk
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Helps prevent cash shortages, even in profitable companies
2. The Income Statement
The income statement reports a company’s revenues, expenses, and profits over a specific time period—monthly, quarterly, or annually. It reveals how well the company performed financially.
Key Features:
-
Follows accrual accounting (records revenue and expenses when earned/incurred, not paid)
-
Ends with net income, which can be a profit or loss
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Typically includes:
Example:
| Description |
Amount |
| Revenue |
$100,000 |
| COGS |
-$40,000 |
| Operating Expenses |
-$30,000 |
| Interest and Taxes |
-$5,000 |
| Net Profit |
$25,000 |
Why It Matters Income Statement:
-
Helps assess business performance and profitability
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Used for decision-making, budgeting, and forecasting
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Investors use it to compare growth and efficiency
3. The Balance Sheet
The balance sheet provides a snapshot of a company’s financial position at a single point in time. It shows what the business owns, what it owes, and the net worth (equity) of the owners or shareholders.
Key Features:
Example:
| Assets |
Liabilities & Equity |
| Cash: $10,000 |
Loan: $5,000 |
| Equipment: $20,000 |
Accounts Payable: $2,000 |
| Inventory: $5,000 |
Shareholder Equity: $28,000 |
Assets ($35,000) = Liabilities ($7,000) + Equity ($28,000)
Why It Matters Balance Sheet:
-
Measures company’s solvency and stability
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Investors use it to evaluate risk and capital structure
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Essential for tracking debt and asset value over time
4. Notes to Financial Statements
The notes to financial statements provide extra context and detailed disclosures behind the numbers in the financial reports. They explain the company’s accounting policies, specific transactions, and assumptions used.
Key Features:
Example:
If the balance sheet shows a $100,000 loan, the notes might explain:
Why It Matters Financial Statements:
-
Increases transparency and accountability
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Helps analysts interpret numbers correctly
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Supports auditing and compliance requirements
5. Statement of Changes in Equity
The statement of changes in equity shows how the company’s equity has changed over a period. It links the income statement and balance sheet by tracking retained earnings and other equity movements.
Key Features:
Example:
| Description |
Amount |
| Opening Equity |
$50,000 |
| Net Income (from P&L) |
+$10,000 |
| Dividend Paid |
-$3,000 |
| Share Issue |
+$5,000 |
| Closing Equity |
$62,000 |
Why It Matters Statement of Changes:
-
Shows ownership value changes over time
-
Important for investors and shareholders
-
Clarifies how profits are reinvested or distributed
How Are These 3 Core Statements Used in Financial Modeling?
In financial modeling, the income statement, balance sheet, and cash flow statement work together to provide a complete picture of a company’s financial health. These statements are interconnected, and financial models rely on their historical trends and relationships to forecast future performance.
Here’s a general step-by-step process of how they’re used in modeling:
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Build the Structure: Start by laying out the line items for each of the three statements. This forms the framework of the financial model.
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Input Historical Data: Fill in historical values for each line item. This data helps analyze past trends and serves as a baseline for future projections.
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Check for Reconciliation: Make sure the statements are correctly linked. For example, the ending cash balance in the cash flow statement should match the cash balance on the balance sheet.
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Create Assumptions: Add an assumptions section to analyze trends between historical periods. These might include growth rates, margins, or cost ratios.
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Project Future Values: Use the assumptions based on historical trends to forecast future values for each line item. These forecasts should align with past patterns to ensure consistency.
-
Add Supporting Schedules: Use detailed schedules for complex items. For example:
These values feed back into the three core financial statements, completing the model and enabling accurate future projections.
Conclusion
The three key financial statements—the income statement, balance sheet, and cash flow statement—work together to provide a clear and complete view of a company’s financial health. These reports help stakeholders understand how a business is performing, how it’s funded, and how it manages its cash.
Want to apply what you’ve learned? Download our free Excel template: Basic 3 Statement Financial Model and start building your own model today!
Frequently Asked Questions: Three Financial Statements
1. Three financial statements with examples
The three main financial statements are:
- Income Statement – Shows a company’s revenues and expenses.
Example: A company reports $500,000 in revenue and $350,000 in expenses, resulting in $150,000 net income.
- Balance Sheet – Displays assets, liabilities, and shareholders’ equity at a specific point in time.
Example: Assets: $1M, Liabilities: $600K, Equity: $400K.
- Cash Flow Statement – Shows cash inflows and outflows from operating, investing, and financing activities.
Example: Operating cash flow: $80K, Investing: -$20K, Financing: $10K → Net increase in cash: $70K.
2. Three financial statements PDF
Looking for a downloadable reference? You can easily find “Three Financial Statements PDF” guides online from finance education platforms or accounting firms. These usually include templates and explanations.
Tip: Want one? I can help create a custom one for you.
3. Financial statements examples
Examples of financial statements include:
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Quarterly financial reports of Apple, Google, or Amazon
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Annual reports published by public companies (10-K filings)
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Startup financial models with projected income, expenses, and cash flow
You can download real examples from the Investor Relations section of any public company website.
4. Income statement
An income statement (also called a Profit & Loss Statement) summarizes revenues, costs, and expenses over a specific period. It shows whether a business made a profit or loss.
Example:
Revenue: $100,000
COGS: $40,000
Operating Expenses: $30,000
Net Income: $30,000
5. What are the 5 types of financial statements?
The five commonly used financial statements are:
-
Income Statement
-
Balance Sheet
-
Cash Flow Statement
-
Statement of Changes in Equity
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Notes to Financial Statements – provide additional details and context to the numbers in the reports
6. Financial statements of a company PDF
To access a company’s financial statements in PDF format:
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Visit the Investor Relations section of a public company’s website
-
Download annual (10-K) or quarterly (10-Q) reports
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Financial data platforms (like Morningstar or EDGAR) also offer downloadable reports
7. Financial statements PDF
Looking for generic templates or examples? Many financial education sites offer free financial statements PDFs, including:
Let me know if you’d like a customized PDF template.
8. Which financial statement shows net worth?
The Balance Sheet shows a company’s net worth, also known as shareholders’ equity. It’s calculated as:
Net Worth = Total Assets – Total Liabilities
This represents what the company owns minus what it owes, showing the value left for shareholders.
