Financial Statement Links

Where is the relationship between the key financial statements? Take a look at this example.

  1. The income statement shows revenue of 500,000.
  2. The cash flow statement shows the cash received from customers is 375,000.
  3. The balance sheet shows under assets the difference, i.e. accounts receivables is 125,000.

    4.  

     The key financial statement flow

    All three financial statements are linked.

    Income statement

    Cash Flow statement

    Balance sheet
    500,000 375,000 125,000

     

    Note: The income statement = cash flow statement + balance sheet. In the example above: 500,000 = 375,000 + 125,000

     

    Commentary on the financial statement links:

    Income statement

    		  

    Cash Flow statement

    		  

    Balance sheet

    Maximum cash flows:

    Here is a key fact about the Income statement- the accounts listed represent the maximum cash flows possible for the business from the sales and expenses incurred during the period. (Taxes also play a part, but lets keep it simple for now).

    		  

    The financial link:

    The Income statement shows the maximum cash flows possible for the business. The Cash Flow statement shows the actual cash flows received and paid by the business.

    		  

    The financial link:

    The Income statement shows the maximum cash flows possible for the business. The Cash Flow statement shows the actual cash flows received and paid by the business. The Balance sheet shows the cash that was not collected or the cash that is owing but not yet paid.
    The Income statement shows the sales, costs of sales and expenses incurred during the period (for example, during the last financial year).   The Cash Flow statement shows the actual cash flows for the business.  

    The Balance sheet shows the assets and liabilities of the business. Usually this will be stated for both the start and end of the period (for example, at the start and end of the financial year).

    The Income statement and cash flows

    		  

    The cash flows

    		  

    The Balance sheet reveals some cash flows

    The cash flows are not revealed in the income statement. The profit shown on the Income statement is the book profit earned, but the profit will usually not have all been received in cash. Some of the sales made will have been paid for, but not all. Some customers will owe you money. Also, some of the expenses your firm has incurred may not have been paid for yet.

    		  

    The Cash Flow statement shows the cash flows from operations (cash received from customers, cash paid to suppliers and staff), from financing activities and investing activities

    		  

    The balance sheet does show some cash flow information. For example, if the opening accounts receivables (or debtors) is 100,000 and the closing accounts receivables is 125,000, then the cash flows from accounts receivables could be:

    Cash collected from opening accounts receivable: 100,000 (assuming all customers paid).

    Cash not collected from sales made during the period: 125,000.

    Tip: A cash flow analysis can be based on the balance sheet. Strategic Focus financial analysis software produces this cash flow report automatically.

       

Financial statement analysis