How Do the Financial Statements Tie Together?

The Securities and Exchange Commission requires all public companies to publish three financial statements. These statements provide information about company performance. The balance sheet gives details about company assets and liabilities, the income statement provides details about company revenues and expenses, and the cash flow statement provides an overview of the companies sources and uses of funds. Each statement supports the other.

The income statement provides an overview of company earnings. It starts with revenues and then adjusts for expenses to arrive at net income. The income statement is divided into three sections which relate to the type of asset being used. Sales minus the costs of goods sold equals gross profit and gross profit minus operating expenses equals operating income. Operating income minus interest expense and a provision for taxes equals net income.

The balance sheet provides an overview of company assets, liabilities and equity. It is also divided between current and long term assets and liabilities. Current refers to the assets which will be used in the next year and those liabilities which will be paid off in the next year, such as inventory. When inventory is sold the cost is referred to as the cost of goods sold which is used to calculate gross profit on the income statement.

Capital assets are those assets which generate revenue in more than one period. As a result, they cannot be fully written off against net income in the year the expense is incurred are subsequently depreciated over time. Capital assets include property, plant and equipment--these are all line items on the balance sheet. As the value of assets decrease they are written off against net income.

The cash flow statement is created from the income statement and the balance sheet. It is a melding of the two. For instance, cash flow from investments includes all purchases of capital assets or equipment. Cash flow from operations starts with net income from the income statement. Cash flow from financing is the cash flow created from the common equity valued on the balance sheet.