Financial Statements Are the Income Essay

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The statement of cash flows separates out the cash flows from the non-cash flows on the income statement. This gives the reader a better indication of the cash position of the company, rather than the position with regards to accounting profit. The statement of cash flows separates cash flows into three categories -- operations, investing and financing. This can help analysts to determine where profits and changes in cash position come from -- do they come from successful operations or from other activities.

The statement of changes to owner's equity explains the changes in retained earnings. It illustrates how the company's activities over the period have impacted the value of the owners' stake in the firm.

These statements are all interrelated. The income statement and the statement of cash flows work together to explain not just profits but the sources of positive and negative cash flows.

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The statement of changes in owner's equity plays a similar role for the balance sheet, acting as a complement to help the investor understand the changes on the balance sheet that specifically impact the firm's owners.

The income statement and balance sheet are also related. While changes on one do not always reflect on the other, by putting the two statements together an analyst can learn a lot about a company. Transactions from the income statement will ultimately affect the balance sheet as well, as those transactions flow through to changes in the firm's assets and equity.

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