The three financial statements
Earnings, cash and what a business owns — three views of one company, and the traffic between them.
Financial statements
A company's financial statements are often treated as three separate reports to be read independently — the income statement for profitability, the balance sheet for financial position, the cash flow statement as an afterthought. In practice, they're three different views of the same underlying business, and the real value comes from understanding how they connect, not from reading any one in isolation.
The income statement
The Income Statement is the company's report card for the year. It answers one question: did this business make money doing what it does? Revenue comes in, costs go out, and what's left is earnings. Simple enough.
But here's the trap — earnings is an opinion, dressed up to look like a fact. It depends on how you count depreciation, how you recognize revenue, what you decide to call "one-time." Warren Buffett always said he'd rather be approximately right than precisely wrong, and the income statement is where a lot of precise wrongness lives.
The cash flow statement
The Cash Flow Statement answers the only question that really matters over time: did cash actually come in the door? Earnings can be an opinion. Cash is a fact — it's either in the bank or it isn't.
Plenty of companies report rising profits while their cash is quietly draining away, usually because customers aren't paying, or inventory's piling up, or they're spending like mad to keep the growth machine running. Cash flow is where the truth hides.
The balance sheet
The Balance Sheet is a snapshot — what the business owns and what it owes, on a given day. Think of it like taking inventory of a farm at sundown. Here's the barn, here's the equipment, here's the cattle — and here's what's mortgaged against it.
Assets minus liabilities gets you equity, which is really just the shareholders' claim on the leftovers after everyone else who's owed money gets paid. A business can look profitable on the income statement and still be walking a tightrope, if the balance sheet is loaded with debt.
The connection
Now here's the part that matters — how they talk to each other.
Net income from the income statement flows into the cash flow statement as the starting point, then gets adjusted for all the non-cash stuff (depreciation, changes in working capital) to show you real cash generated. That cash then either builds up on the balance sheet, pays down debt, gets returned to shareholders, or gets reinvested into new assets — which shows up back on the balance sheet, and which will eventually generate more depreciation on the income statement next year. Round and round it goes.
If you only read the income statement, you're reading a company's story about itself. Read all three together, and you're reading its biography — where the cash actually came from, where it actually went, and what's actually left over. That's the full circuit — nothing on any one statement happens in isolation; it's either coming from or feeding into the other two.
Homework
Three companies, three sets of statements that disagree with each other. In each case the disagreement is the information.