Financial statements explained: Balance Sheet, Income Statement & Cash Flow

For business owners, financial statements are more than just numbers on a page—they’re essential tools that show how your company is performing and where it’s headed. At YYC CPA Professional Corporation, we often meet clients who know their financial reports are important but aren’t quite sure what each statement really means.

In this post, we’ll break down the three core financial statements—the balance sheet, income statement, and cash flow statement—in simple terms, so you can use them to make smarter business decisions.

Why Financial Statements Matter

Financial statements provide a clear snapshot of your business’s financial health. Banks, investors, and tax authorities rely on them, but more importantly, you should rely on them to:

• Track performance and profitability

• Identify trends in revenues and expenses

• Manage cash effectively

• Plan for growth and taxes
  
  

Let’s dive into each of the three main statements.

The Balance Sheet: A Snapshot of Your Business

The balance sheet shows your business’s financial position at a specific point in time. It answers the question: What do I own, and what do I owe?

It follows the basic formula:

Assets = Liabilities + Equity

• Assets: Everything your business owns (cash, accounts receivable, inventory, equipment, property).

• Liabilities: What your business owes (loans, accounts payable, credit card balances).

• Equity: The owner’s interest in the business (retained earnings, invested capital).
  
  

👉 Example: If your company owns $500,000 in assets and owes $300,000 in liabilities, then the remaining $200,000 is your equity.

The balance sheet helps you evaluate liquidity, financial stability, and debt levels—crucial when applying for financing or planning expansion.

The Income Statement: Measuring Profitability

Also known as the profit and loss statement (P&L), the income statement shows your revenues and expenses over a specific period (monthly, quarterly, or annually).

It answers the question: Is my business profitable?

Key sections include:

1. Revenue (Sales) – Money earned from selling goods or services.

2. Cost of Goods Sold (COGS) – Direct costs of producing your products or services.

3. Gross Profit – Revenue minus COGS.

4. Operating Expenses – Overheads like rent, salaries, utilities, and marketing.

5. Net Income (or Loss) – The bottom line: profit after all expenses and taxes.
   
   

👉 Example: If your business generates $1,000,000 in sales, with $600,000 in expenses, your net income is $400,000.

The income statement helps you understand profitability trends, spot rising costs, and make informed pricing or cost-cutting decisions.

The Cash Flow Statement: Tracking Cash In and Out

Even profitable businesses can fail if they run out of cash. That’s where the cash flow statement comes in.

This report shows how cash moves through your business in three categories:

1. Operating Activities – Cash from day-to-day operations (customer payments, supplier payments, wages).

2. Investing Activities – Cash spent on or earned from buying/selling assets (equipment, property, investments).

3. Financing Activities – Cash from loans, equity injections, or dividend payments.
   
   

👉 Example: A business may show a profit on its income statement but negative cash flow if clients haven’t paid invoices yet.

The cash flow statement is vital for monitoring liquidity, ensuring you can cover payroll, pay suppliers, and reinvest in growth.

How the Three Statements Work Together

Although each financial statement tells a different story, they are interconnected:

• The income statement shows your profit.

• That profit flows into the equity section of your balance sheet.

• Meanwhile, the cash flow statement explains why your cash balance might differ from your net income.
  
  

Together, they provide a full picture of your business’s financial health, helping you make informed decisions and plan for the future.

Using Financial Statements to Grow Your Business

Understanding financial statements isn’t just about compliance—it’s about strategy. Here’s how business owners benefit:

• Identify strengths and weaknesses: Spot which products or services are most profitable.

• Plan for taxes: Anticipate obligations and avoid surprises.

• Secure financing: Lenders and investors want to see accurate, well-prepared statements.

• Make data-driven decisions: Choose when to hire, expand, or cut costs with confidence.
  
  

At YYC CPA Professional Corporation, we don’t just prepare financial statements—we help you interpret them and use them as a roadmap for success.

Final Thoughts

Financial statements may seem intimidating at first, but they are powerful tools when you know how to read them. The balance sheet shows what you own and owe, the income statement shows your profitability, and the cash flow statement reveals your ability to manage cash.

👉 Ready to gain clarity and control over your finances? Contact YYC CPA Professional Corporation today—our team of CPAs will ensure your financial statements are accurate, compliant, and meaningful for business growth.