Imagine financial statements as a 3 to 12 page book that tells the financial story of a business. Everybody has time to read and understand a 12 page book!
The table of contents for the book looks like this:
Chapter 1 – Profit and Loss Statement (also called Income Statement)
Chapter 2 – Cash Flow Statement
Chapter 3 – Balance Sheet
Content in the three chapters tells the story of the financial decisions and results of those decisions for a business during a specific period of time. As the practice conducts its business, the accounting system tracks, organizes and records the financial transactions of the business. At the end of a period of time in the life of the business, whether that period of time is a week, month, quarter, year, etc., the information is used to prepare the financial statements for the business.
Like water flowing down hill, money flows through the financial statements. Net Operating Profit, the bottom line of the P&L, becomes Cash Flow From Operating Activities, the top line of the Cash Flow Statement. Cash, the bottom line of the Cash Flow Statement becomes Cash, the top line of the Balance Sheet.
Eureka! After reading 221 words you understand more about financial statements than most of your peers.
