5 questions foundThe income statement (profit or loss), the balance sheet (statement of financial position), the statement of cash flows, and the statement of changes in equity, plus notes.P&L, Balance Sheet, Cash Flow, Changes in EquityReal-world example Investors read all four together to judge performance and position.Financial performance over a period: revenue less expenses equals profit or loss.Revenue 100,000 - Expenses 78,000 = Profit 22,000Real-world example Shows whether the business was profitable this year.What does the balance sheet show?
Intermediate The financial position at a point in time: assets, liabilities and equity, with assets equal to liabilities plus equity.Assets 250,000 = Liabilities 90,000 + Equity 160,000Real-world example A snapshot lenders use to assess solvency and gearing.Profit from the income statement flows into retained earnings (equity) on the balance sheet; the cash flow statement reconciles profit to the movement in cash between two balance sheets.Net profit -> Retained Earnings; Cash flow -> change in CashReal-world example A model must keep the three statements interconnected and balanced.Usually the income statement first (to get profit), then the statement of changes in equity, then the balance sheet, then the cash flow statement.P&L -> Equity -> Balance Sheet -> Cash FlowReal-world example Profit is needed before equity and the balance sheet can be completed.