Reading Company Financial Statements: A Plain-Language Guide

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What you will learn

• What the income statement, balance sheet and cash flow statement each show.
• How the three statements connect.
• Where US companies publish them: the 10-K and 10-Q reports.

Why are there three statements?

Could one table tell you both how much a company earned and how much cash it has?

Each statement answers a different question:

• Income statement: did the company earn a profit over a period, such as a quarter or a year?
• Balance sheet: what does the company own and owe at one moment, the last day of the period?
• Cash flow statement: how much cash came in and went out over the period, and why?

A company can report a profit and still run short of cash, or report a loss while cash grows. Reading all three together shows why.

Three statements diagram

Illustrative diagram constructed for teaching. Not real market data.

The diagram shows the three statements for a fictional company as linked boxes: net income flows from the income statement into the cash flow statement and into equity on the balance sheet, and ending cash on the cash flow statement matches cash on the balance sheet. It is constructed for teaching and is not real market data.

What is on the income statement?

Starting from everything customers paid, what gets subtracted before you reach profit?

From top to bottom, a simplified income statement runs:

Net income divided by the average number of shares outstanding during the period gives earnings per share (EPS). With 50 million shares, EPS here is $2.00. Diluted EPS also counts shares that could be created from options and convertible securities.

What is on the balance sheet?

What does the company own, what does it owe, and what is left for shareholders?

The balance sheet always balances: assets = liabilities + shareholders’ equity.

• Assets include cash, money owed by customers (receivables), inventory, and property and equipment.
• Liabilities include money owed to suppliers, debt and other obligations.
• Equity is what would be left for shareholders if every asset were turned into cash at its recorded value and every liability paid. Recorded values often differ from what assets would actually sell for.

What is on the cash flow statement?

If profits are an accounting measure, where do you see the actual cash?

The cash flow statement has three sections:

• Operating activities. Cash from the business itself. Most companies use the indirect method: it starts from net income and adjusts for items that are not cash, such as depreciation, and for changes in receivables, inventory and payables. A few use the direct method, which lists cash received and paid, and still show a reconciliation from net income.
• Investing activities. Cash spent on or received from long-lived assets and acquisitions. Spending on property and equipment is called capital expenditure.
• Financing activities. Cash from borrowing, repaying debt, issuing shares, buying shares back and paying dividends.

Operating cash flow minus capital expenditure is often called free cash flow. It is not a defined accounting term, so companies and data providers calculate it in slightly different ways.

Where do the statements come from?

Why read the company’s own filing when a website already shows the numbers?

US companies that report to the Securities and Exchange Commission (SEC) file an annual report on Form 10-K and a quarterly report on Form 10-Q for each of the first three fiscal quarters. The fourth quarter is covered by the annual 10-K. They are free on the SEC’s EDGAR system. The filings include notes explaining accounting choices, risks and one-off items that summaries on data sites can leave out. Annual statements are audited; quarterly ones are reviewed by an outside accountant but not audited. Foreign companies listed in the United States usually file an annual report on Form 20-F and other reports on Form 6-K instead, are not required to file quarterly reports, and may prepare statements under International Financial Reporting Standards (IFRS).

What this does not tell you about financial statements

• Whether a company is a good investment. Statements describe the past.
• Every accounting rule. Revenue recognition, leases and stock-based pay can change the numbers a great deal; the notes explain the company’s choices.
• How a stock price will react to any figure.
• Nothing here recommends any company or stock.

Check yourself

1. A fictional company has revenue of $500 million and cost of goods sold of $300 million. What is gross profit? Hint: subtract.
2. Which statement shows what a company owns and owes on one day? Hint: it always balances.
3. Net income is $40 million and there are 20 million shares. What is EPS? Hint: divide.

Last reviewed November 8, 2026. Spotted a mistake? Report an error.