Intermediate · Lesson 1 of 9

The three financial statements

8 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

Every listed company publishes three core statements. The income statement (profit and loss) shows revenue, costs and profit over a period. The balance sheet shows what the company owns (assets), owes (liabilities) and the owners' share (equity) at one moment. The cash flow statement shows the actual cash that came in and went out, split into operating, investing and financing activities.

They link together: profit from the income statement adds to retained earnings on the balance sheet, and the cash flow statement explains why the cash balance changed.

Profit can be flattered by accounting choices; cash is harder to fake. Analysts often compare net profit with operating cash flow. If profit keeps rising while operating cash flow falls, ask why.

Key takeaways

Income statement = performance over time; balance sheet = position at a point; cash flow = real cash.
Assets = liabilities + equity, always.
Compare profit with operating cash flow to test earnings quality.

Check your understanding

1. Which equation always holds on a balance sheet?

Revenue = costs + profit
Assets = liabilities + equity
Cash = profit
Equity = revenue - debt

Show the answer

Assets = liabilities + equity. This is the accounting identity.

2. Profit rises for three years while operating cash flow falls. This suggests...

Very high quality earnings
Earnings quality should be checked
The company has no debt
Dividends will rise

Show the answer

Earnings quality should be checked. A gap between profit and cash can signal aggressive accounting or working-capital problems.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.