Billionaire Warren Buffet once said, “In the business world, the rearview mirror is always clearer than the windshield.” That’s exactly what the three key financial keys are: the rearview mirror. The income statement, the balance sheet, and the statement of cash flows all combine to show exactly what happened in the past. The income statement is a report generated to show the profitability of the company. It shows sales less expenses during a specified period of time. It is prepared in such a way that the profit after each expense can be determined easily. For example, on page 27 of our book is the Income Statement for Kramer Corporation. You can clearly see that the profit after Cost of Goods sold is $500,000, even though the report brings actual profit down to $100,000 after further expenses are deducted.
The Balance Sheet is a statement of accounts that basically shows on a particular day what total assets and total liabilities plus owner’s equity is. The balance sheet is cumulative of all transactions that have occurred prior to the generation of the report – it is essentially a snapshot of the accounts, and is not targeted to a specified period of time like the income statement. From the Balance Sheet, one can determine the net worth of a company.
Lastly, the Statement of Cash Flows reflects Net increase or decrease in cash after adjustments. It helps clarify what may be considered as inconsistencies on the Income Statement. On page 34, the book tells us that if a company recognizes a $1 Million profit transaction on the Income Statement that it may not receive payment for during the year, the report would be overstated. By using the Statement of Cash Flows in conjunction with the other two reports, one can make the visual connections necessary for determining where the company’s money really is.
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