The 3 Financial Statements

Income statement answers…

Did the company make money? It reads top to bottom like a waterfall.

Income statement waterfall order

Revenue − cost of goods sold = gross profit − operating expenses = operating income − interest and taxes = net income.

Maple income statement

Revenue $100M, COGS −$60M, gross profit $40M, operating expenses −$28M, operating income $12M, interest and taxes −$4M, net income $8M.

Gross profit

Revenue minus cost of goods sold (what it costs to make the product).

Gross margin formula and meaning

Gross profit ÷ revenue. Maple: $40M ÷ $100M = 40%. Higher means pricing power. Falling margins mean competition or rising costs.

Operating income

Gross profit minus operating expenses (staff, rent, etc.), before interest and taxes.

Net margin formula

Net income ÷ revenue. Maple: $8M ÷ $100M = 8%. The fraction of each sales dollar that becomes profit.

Income statement: what to look for

Gross margin, revenue trend (growing, flat, or shrinking), and net margin.

Balance sheet answers…

What does the company own and owe? It's a snapshot on a single day.

Balance sheet equation

Assets = Liabilities + Equity.

Assets / liabilities / equity

Assets: cash, inventory, equipment, money customers owe. Liabilities: loans, bills, money owed to suppliers. Equity: what's left for owners.

Balance sheet: what to look for

Cash vs. debt, how fast debt is growing, and goodwill.

Goodwill

An accounting entry from past acquisitions that can be written off later, wiping out equity.

Cash flow statement answers…

Where did the actual money go? The one beginners skip, and often the most honest.

Why cash flow can be more honest than profit

Profit can be an accounting opinion; cash is a fact. A company can show a profit and still run out of money if customers aren't paying.

Operating cash flow: what to look for

Should be positive and roughly match net income. If profit is $8M but operating cash flow is $1M, ask why.

Free cash flow (FCF) formula

Operating cash flow minus money spent on equipment and upgrades. What is truly left for owners. The number professionals trust most.

Which statement shows each question

Income statement: did it make money? Balance sheet: what does it own and owe? Cash flow: where did the cash go?