Financial Statements
Income statement, balance sheet and cash flow statement.
Three statements summarise a company's finances. The income statement shows revenue minus expenses over a period, ending in net income. The balance sheet is a snapshot of assets, liabilities and equity at one moment. The cash flow statement tracks actual cash moving in and out from operating, investing and financing activities.
They connect: net income from the income statement flows into retained earnings on the balance sheet, and the cash flow statement explains the change in the cash line. A company can report a profit and still run out of cash, which is why analysts read all three together.
Key ideas
- Net income revenue expenses.
- Gross profit revenue cost of goods sold; margin .
- Ending retained earnings beginning net income dividends.
- Current ratio measures short-term liquidity.
Worked example
Revenue is $500,000, cost of goods sold $300,000 and operating expenses $120,000. Find gross margin and net margin (ignore taxes).
- Gross profit: ; gross margin .
- Net income: .
- Net margin: .
Answer: Gross margin , net margin
Common mistakes
- Confusing profit with cash.
- Putting a period figure (revenue) on the balance sheet.
- Dividing margins by cost instead of revenue.
Practice questions
Try each one, then open the answer. Numerical answers on this page are verified by an automated calculation check.
1.Current assets $60,000, current liabilities $40,000. Current ratio?
Show answer
2.Retained earnings start at $100,000; net income $30,000; dividends $10,000. Ending balance?
Show answer
$120,000
3.Net income $45,000 on revenue $300,000. Net margin?
Show answer