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The 3 Major Financial Statements

Free Video Tutorial: Income Statement, Balance Sheet, Statement of Cash Flows

In this tutorial, we're going to review the three major financial statements: the income statement, the balance sheet, and the statement of cash flows.

3 Major Financial Statements

Right now, I'm viewing Apple's latest annual report filed on October 30th. 2019. It's their 10-K.

Income Statement

I'm going to go to the income statement first. I'm going to scroll down to the table of contents and I see that item eight will take me to the financial statements and supplementary data. Clicking on that, I get to Apple's consolidated statements of operations, also known as the income statement. The income statement shows us the profit or loss over a period of time.

In this case, for Apple, it shows a profit or loss over the year, and in September 28th, 2019 as well as the two preceding years. It's also worthwhile to note that this is presented in millions.

Meaning that this two hundred sixty thousand of total net sales for the latest fiscal year is really two hundred and sixty billion. OK. Multiply the numbers there by a million. So two hundred sixty thousand goes to two hundred sixty billion.

In summary, the income statement starts with the total company sales or revenues and subtracts all the costs, including the cost of sales. Operating expenses. Income taxes to get to a net income. No. Apple generated fifty-five or approximately fifty-five billion dollars in profit for its latest fiscal year at the time of this recording.

Now the income statement also shows the earnings per share. It takes a net income and divides by the total share count over the period. Now we discuss basic versus diluted earnings per share in a separate video.

Learn more about the income statement 

Balance Sheet

The next major statement is the balance sheet, the balance sheet is broken up into three sections assets, liabilities, and shareholders' equity assets is what a company owns an apples case.

Assets

They have cash and equivalents. They have securities that could easily be converted into cash, short term investment, accounts receivable, what they're owed from clients or customers, inventories, goods produced but not yet sold. And a bunch of other assets, namely plant property and equipment, which is the manufacturing prod, the manufacturing equipment, and facilities needed to produce their iPhones and computers.

Liabilities

The next section is the liability section that includes money owed to vendors. It includes debt. It also includes revenues or customers or receipts that they have received for goods that they have not yet delivered. That's called deferred revenue. That means they collected cash but have yet to deliver the goods or services. The major item in the liability section for most companies is going to be debt and it's broken out into short term debt. Anything maturing within a year and long term debt, anything maturing greater than a year.

Shareholders Equity

The final section is shareholders' equity. The way to think about that is it's the money that investors put into the company either directly contributed capital. Meaning investors in an IPO. When a company IPO is, investors buy the shares and that capital goes to the company. That's one form. Another way that investors contribute to the company, I would say that in quotes is by leaving profits in the company. So let's say Apple generated net income or profit and it didn't distribute that in the form of dividends that would be retained earnings. Now, something really important to understand about the balance sheet is that it shows you the assets, liabilities, and shareholders equity at a point in time, whereas the income statement shows us the proffer a loss over a period of time. So what this says here is it says Apple at September twenty-eighth, 2019 has forty-eight billion dollars, almost forty-nine billion dollars in cash at a point in time. That's the balance sheet.

Statement of Cash Flows

The next major financial statement is the statement of cash flows. Now, without going too in-depth into the statement of cash flows and without looking at it line by line high level, the statement of cash flow shows us a reconciliation of the company's cash. Now, you might ask yourself, isn't the income statement? Doesn't the income statement do that already? Well, no. In the income statement, it doesn't reflect necessarily the cash collected for revenues. It doesn't account for the cash spent on expenses. The income statement is presented in accrual accounting and we have a separate tutorial on accrual versus cash-based accounting because of several differences in accrual versus cash that the cash flow statement is needed. Additionally, there are several items that don't show up on the income statement, like the purchase of plant property and equipment.

The income statement only shows depreciation. It doesn't show the actual purchase of PPA in the income statement also doesn't show items like proceeds from issuance of stock dividends, payment and issuance of debt. So the cash flow statement is important for several reasons. The bottom line and the cash flow statement will be how much did the company's cash change over a period of time? What was the beginning? A beginning and ending balance? It's basically a reconciliation.

The cash flow statement is broken up into three sections. Cash flow from operations, investing, and financing, whereas operations covers things day to day related to revenues and expenses. Investing would cover acquisitions, investments, purchases of marketable securities, and financing would cover anything related to transactions with owners. And I would say that in, quote, like issuing or repurchasing stock paying dividends, issuing, issuing or repaying debt.

Recap

Those are the three major financial statements we have separate tutorials that go into more depth on each one of them. This is just meant to provide a high-level overview of the major statements.

More Free Investing & Finance Resources

If you really want to value a company properly you have to look at a wide range of metrics ratios and financial modeling, I definitely recommend looking into other videos and tutorials that we have on topics like dividend yieldsDCF modeling guide, and financial accounting classes to get a complete picture on a company's valuation and prospects.

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