What are the three financial statements and what does each show?
Model answer
Income statement: profitability over a period (revenue down to net income). Balance sheet: a snapshot of assets, liabilities and equity at a point in time. Cash flow statement: actual cash moving in/out over a period, split into operating, investing and financing.
⚠ Common wrong answer: Describing the balance sheet as showing performance 'over the year' and treating the cash flow statement as just the income statement restated in cash. Why it fails: The balance sheet is a snapshot at a single point in time, not a period measure, and the cash flow statement exists precisely because accrual net income is not cash — non-cash charges and working-capital timing drive the two apart.
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More from Accounting & the 3 Statements
- Walk me through how a $10 increase in depreciation flows through the three statements (40% tax).
- How are the three statements linked?
- A company buys $100 of inventory on credit (no cash yet). Walk through the three statements.
- Why can a profitable company still run out of cash?
- What's the difference between cash-based and accrual accounting?
- If you could use only one statement to evaluate a company, which would you pick and why?
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