The three statements — and how they connect

The three views of one company

Every public company files three financial statements. They're not three different companies — they're three views of the same company, each answering a different question. Once you know what each one is asking, the rest of accounting becomes much less scary.

The three statements:

1. Income statement — "Did the company make money this period?"
2. Balance sheet — "What does the company own and owe right now?"
3. Cash flow statement — "Where did the cash actually go?"

Three windows into the same building. Together they describe the company's financial life. Apart, each leaves out things the other two cover.

Why three? — the cash vs. earnings problem

If accounting were simple, "earnings" and "cash" would be the same thing. They're not. A company can show big earnings on its income statement while running out of cash. A company can have plenty of cash while reporting losses. The gap comes from accrual accounting — counting revenue when earned (not when cash arrives) and expenses when incurred (not when cash leaves).

This is why Cash Flow Statement exists separately from Income Statement. The income statement tells the story of profit. The cash flow statement tells the story of money actually moving. The balance sheet tells you what state things are in right now.

How they connect (the trace)

The statements aren't independent — they tie together:

• Net income from the income statement flows into retained earnings on the balance sheet.
• Net income is the starting line of the cash flow statement (which then adjusts for non-cash items).
• The cash balance on the balance sheet equals starting cash + net change in cash from the cash flow statement.

That triangular relationship means if you understand any two, you can derive most of the third. Auditors check whether they all reconcile correctly.

Why we care for valuation

Track 6 will need cash flow as the input to DCF / Gordon Growth. Specifically free cash flow (FCF) — the cash a company generates that's actually available to investors after necessary spending. FCF lives at the intersection of all three statements: it starts from net income, adjusts using cash flow statement details, and informs balance sheet changes.

So this track isn't accounting for accounting's sake — we need just enough to get to FCF and understand which numbers in real reports actually matter for valuation.

The takeaway

Three statements, three views of one company. Income statement = profitability. Balance sheet = state right now. Cash flow statement = where the money moved. They tie together via net income → retained earnings → cash balance. The destination of this track is free cash flow, the input to the equity valuation work in Track 6.