How does it complement another financial statement?
To understand how one financial statement complements another, let's first discuss the main financial statements:
1. Income Statement: This statement shows a company's revenue, expenses, and profit or loss over a specific period. It provides information about a company's profitability.
2. Balance Sheet: The balance sheet presents a snapshot of a company's financial position at a specific point in time. It includes assets, liabilities, and equity, depicting what the company owns and owes.
3. Cash Flow Statement: This statement summarizes a company's cash inflows and outflows, detailing how cash has been generated and used during a given period.
These statements are interconnected and provide different perspectives on a company's financial health. They complement each other in the following ways:
1. Income Statement and Balance Sheet: The income statement measures a company's financial performance over a period, showing revenue, expenses, and profit or loss. The balance sheet, on the other hand, provides a snapshot of the company's financial state at a specific point in time. By comparing the profit or loss from the income statement with the owner's equity on the balance sheet, you can understand how profit or loss impacts the company's overall value.
2. Balance Sheet and Cash Flow Statement: The balance sheet provides information on a company's assets, liabilities, and equity, which affects its overall financial position. The cash flow statement, in turn, shows how cash moves in and out of the company. By comparing the changes in cash on the cash flow statement with the change in cash reported on the balance sheet, you can identify any discrepancies, understand the sources of cash (such as operating activities, investing activities, or financing activities), and evaluate the company's ability to generate and manage cash.
In summary, the financial statements complement one another by offering different perspectives and details about a company's financial performance, position, and cash flow. Analyzing these statements collectively can provide a comprehensive understanding of a company's financial health.