Every public company in the world produces three financial statements every quarter. Together, they tell you what the business earned, what it owns, and where its cash actually went. Read them well and you can form an independent view of any company on earth. Read them poorly and you'll trust whatever number is fed to you.
Who they're written for
Investors, lenders, regulators, employees with stock comp, and competitors. The statements aren't written for the company itself — management already knows the numbers. They're written for everyone outside who has a stake in trusting them.
Because they serve so many audiences, the statements compromise. Detail is buried in the notes. Categorization is sometimes flexible. The same underlying reality can produce different-looking statements depending on which accounting policies management chose. Your job is to see through that.
Why three statements instead of one
If you tracked only profit, you'd miss companies that earned profit on paper but burned cash. If you tracked only cash, you'd miss the long-term assets being built up. If you tracked only assets, you'd miss whether they're being financed by equity or debt.
- Income statement — performance over a period (a quarter or a year)
- Balance sheet — position at a point in time (the last day of that period)
- Cash flow statement — cash movement over the same period as the income statement
They reconcile. Net income from the income statement is the starting point of the cash flow statement. Retained earnings on the balance sheet rolls forward by net income minus dividends. The three are different windows onto one underlying business.
GAAP, IFRS, and why the rules matter
US companies report under GAAP (Generally Accepted Accounting Principles). Most of the rest of the world uses IFRS (International Financial Reporting Standards). They're 90% the same, but the 10% can be material — particularly around inventory, leases, and revenue recognition. When comparing a US company to a European one, check the policies.
The single most important sentence in this course
Accounting is not finance. Accounting describes what happened in standardized form. Finance asks whether the business is creating value. Statements are the input; analysis is the output.
What a 10-K actually is
The annual filing every US public company submits to the SEC. It's free at sec.gov. It contains: management's discussion (MD&A), the audited statements, the notes, risk factors, segment data, and a lot more. Treat it as the source of truth — investor presentations and earnings releases are marketing.
Where to find them
Go to sec.gov/edgar, search a ticker, and you'll find every 10-K, 10-Q, and 8-K the company has ever filed. For non-US companies, look for the 20-F (foreign private issuers) or the company's own annual report on its IR site.
Exercise
A new analyst is reviewing two companies and reports the following: Company A has a $50m net loss but generated $80m of operating cash flow. Company B has a $30m net profit but used $20m of operating cash flow. They ask: 'Which company is more financially healthy?' (1) What does each pattern tell you about the underlying business? (2) What additional information would you ask for before deciding? (3) Walk through the three most-likely explanations for Company A's divergence between net loss and positive cash flow. (4) Walk through the three most-likely explanations for Company B's divergence between net profit and negative cash flow.