Three views of one business
An income statement summarises revenue and expenses over a period. A balance sheet presents assets, liabilities, and equity at a single date. A cash-flow statement explains how cash moved over a period.
Each statement answers a different question. Together they describe what a business earned, what it owns and owes, and whether cash actually arrived.
Key points
- Income statement: performance over a period.
- Balance sheet: position at a point in time.
- Cash-flow statement: where cash came from and went.
The accounting equation
Assets = Liabilities + Equity
Everything a business owns is financed by debt or by owners' capital.
- Assets
- Resources controlled by the business
- Liabilities
- Amounts owed to others
- Equity
- Owners' residual interest
FV = PV × (1 + g)ⁿ
Compare revenue or profit across years by applying a constant growth rate.
The accounting equation always holds. When a transaction changes one side, it changes the other side too, which is why the balance sheet is called a balance.
Profit and cash are different
A company can record a sale before the customer pays. The income statement shows revenue, while the balance sheet shows a receivable. When the customer finally pays, cash rises and the receivable falls, but no new revenue is created.
This timing gap is why a profitable company can still run short of cash. The cash-flow statement is the bridge between reported profit and the change in the bank balance.
A reliable reading sequence
Start with the business model and the reporting period. Read all three statements together, compare several periods, and then read the notes that accompany them.
Look for trends rather than a single number. Rising revenue with rising receivables may signal aggressive credit. Falling cash with rising profit deserves an explanation.
Key points
- Read the statements as a set, not one at a time.
- Compare at least three periods before drawing a conclusion.
- The accompanying notes explain the accounting choices.
02 / Calculate
Watch value compound.
Change the starting amount, the rate, or the horizon. A negative rate models inflation and shows the loss of buying power.
An annual ৳100,000 grows at 8% for 15 years with no extra contributions.
Future value
৳317,216.91
After 15 years the balance is ৳3.17 L. You contributed ৳100,000.00 and earned ৳217,216.91 in growth.
Total interest earned
৳217,216.91
Compounding vs simple interest
+৳97,216.91
Year by year
| Year | Opening | Added | Growth | Closing |
|---|---|---|---|---|
| 1 | ৳100,000.00 | ৳0.00 | ৳8,000.00 | ৳108,000.00 |
| 2 | ৳108,000.00 | ৳0.00 | ৳8,640.00 | ৳116,640.00 |
| 3 | ৳116,640.00 | ৳0.00 | ৳9,331.20 | ৳125,971.20 |
| 4 | ৳125,971.20 | ৳0.00 | ৳10,077.70 | ৳136,048.90 |
| 5 | ৳136,048.90 | ৳0.00 | ৳10,883.91 | ৳146,932.81 |
| 6 | ৳146,932.81 | ৳0.00 | ৳11,754.62 | ৳158,687.43 |
| 7 | ৳158,687.43 | ৳0.00 | ৳12,694.99 | ৳171,382.43 |
| 8 | ৳171,382.43 | ৳0.00 | ৳13,710.59 | ৳185,093.02 |
| 9 | ৳185,093.02 | ৳0.00 | ৳14,807.44 | ৳199,900.46 |
| 10 | ৳199,900.46 | ৳0.00 | ৳15,992.04 | ৳215,892.50 |
| 11 | ৳215,892.50 | ৳0.00 | ৳17,271.40 | ৳233,163.90 |
| 12 | ৳233,163.90 | ৳0.00 | ৳18,653.11 | ৳251,817.01 |
| 13 | ৳251,817.01 | ৳0.00 | ৳20,145.36 | ৳271,962.37 |
| 14 | ৳271,962.37 | ৳0.00 | ৳21,756.99 | ৳293,719.36 |
| 15 | ৳293,719.36 | ৳0.00 | ৳23,497.55 | ৳317,216.91 |
Test the assumption
What if the rate changes?
The same inputs, compared across nearby rates.
6.0% rate
৳239,655.82
Comparison scenario
8.0% rate
৳317,216.91
Your current assumption
10.0% rate
৳417,724.82
Comparison scenario
Growth uses a constant annual rate with interest added once a year. Contributions are added at each year-end. Real products compound more often and carry fees, taxes, and risk.
03 / Apply
A profitable business with no cash
A wholesaler reports ৳200,000 of profit but its bank balance fell. Revenue rose 25% and most sales were made on 90-day credit. Inventory also increased to meet expected demand.
The assumptions
- Profit is stated before any cash-flow adjustments.
- Customers take the full 90 days to pay.
- The business pays suppliers in 30 days.
What to take away
01
Growth in receivables and inventory absorbs cash.
02
Profit measures performance, not liquidity.
03
The cash-flow statement explains the difference.
Your turn
0 of 3 answered
01Question
Which statement shows what a business owns and owes at a single date?
02Question
Revenue of ৳100,000 grows 10% a year for two years. What is the revenue in year two?
03Question
A company records a credit sale. What happens immediately?
Take it into the Lab
Experiment with the same idea.
The Lab turns this topic into a workspace: change the drivers, watch the statements move, and see the consequence before you commit to a decision.
What-if analysis
Change price, cost, and working capital. Watch margins, return, and risk move together.
Open the labFormula lab
Understand, manipulate, observe, solve, then apply the formula to a decision.
Walk the formulaStatement playground
See how one driver propagates through the income statement, balance sheet, and cash flow.
Open the playgroundSources & further reading
OpenStax · Principles of Finance (free textbook) ↗Educational sample content. Worked examples use hypothetical figures. Dates refer to the note's latest content update.