Connecting The 3 Financial Statements

Dec '25 • Tips

Here's how you connect the 3 financial statements. We have a session planned for Jan to walk you through how to read these like a deal maker.

Here's What You Need to Learn:

How to read financial statements

How they differ from each other

How they interconnect

By mastering these skills, you unlock numerous benefits, including:

Running or analysing business more effectively

Implementing changes to optimise cash flow

Increasing profitability

and much more.

Let's dive deep into how these statements function...

The 3 Essential Financial Statements

What Each Statement Represents:

Profit & Loss Statement → Your performance

Balance Sheet → Your financial position

Statement of Cash Flows → Your cash flow

The Profit & Loss Statement

This statement reveals your income and expenses.

Income Summary:

Revenue → Income from core business activities

Other Income → Income from non-core activities (e.g., credit card points)

Expense Summary:

Cost of Goods Sold → Costs directly related to producing a product or service

Operating Expenses → Costs related to running business operations

Other Expenses → Costs unrelated to income generation or business operations

The key metric in the Profit & Loss statement is net income, calculated by subtracting total expenses from total income. This statement informs the other two statements but does not consider their activities.

The Balance Sheet

This statement provides a snapshot of your company’s financial position.

Components:

Assets → Economic resources owned or controlled by the business

Liabilities → Amounts owed to creditors

Owner's Equity → Amounts owed to the owners

The Balance Sheet is cumulative, the only one of the three statements to present information this way. It incorporates data from the Income Statement via retained earnings, which is the cumulative balance of net income.

The Statement of Cash Flows

This statement details your cash movements.

Sections:

Cash from Operating Activities → Cash flow from business operations

Cash from Investing Activities → Cash flow related to long-term assets

Cash from Financing Activities → Cash flow from investments by owners and creditors, including amounts received and repaid

The Statement of Cash Flows does not introduce new data; it aggregates information from the other two statements. It draws net income, depreciation, and amortisation from the Profit & Loss Statement, and the net change in assets, liabilities, and owner's equity from the Balance Sheet.

Hope this helps!

Dee

0 comments

Connecting The 3 Financial Statements