balance sheet

The Trinity of a Business

There are three important financial statements that any business brings out every year. These are

  1. Balance Sheet (Financial Position)
  2. Profit and Loss Statement/ Income Statement (Financial Performance)
  3. Cash Flow Statement

A successful analysis of the company’s fundamentals require the ability to understand these statements and read the signals the numbers project. In this post, let us try to understand what each of these statements are and why the balance sheet in particular is important.

The Balance Sheet: The balance sheets is a statement that indicated the Financial Position of the company. It tells investors what assets the company possesses, what are its liabilities and what its net worth/book value/share capital ( assets – liabilities) is etc.

The Income Statement/Profit and Loss Statement: Just like the financial position of a company, another important concern for a potential investor is the financial performance of the company. The income statement is the source for obtaining this information. It is a record of the company’s profitability. It tells how much the company has made (or lost)

The Cash Flow Statement: The cash flow statement is a record of the actual changes in cash compared to the income statement; it shows you where the cash was brought in and where the cash was disbursed.

All three of these statements are very important in-order to understand how a business is doing. Accounting is the language of business and these three financial statements, the balance sheet among them, are the report card.

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