Financial Statement Links

What is the relationship between the key financial statements? Here is an example:

All three financial statements are linked.

Income statementCash Flow statementBalance sheet
500,000375,000125,000

In this example, the financials are linked as follows:

  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.

The key financial statements flow (they are linked)!

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 statementCash flow statementBalance 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.
Income statement: maximum cash flows possible.
Cash Flow statement: actual cash flows received or paid.
The Balance sheet shows the difference. It 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).

 

Cash flow information that can be obtained from the financial statements

Income statementCash flow statementBalance sheet
The Income statement and 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.

However, see the comment above regarding the income statement and Maximum cash flows.
The cash flows

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 reveals some cash flows

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

 

"The financial statements are linked!"