The three financial statements are the income statement, the balance sheet and the cash flow statement. The income statement shows whether the business made a profit over a period: revenue minus expenses equals net income. The balance sheet is a snapshot on one date of what the business owns (assets), what it owes (liabilities) and what belongs to the owners (equity), and assets always equal liabilities plus equity. The cash flow statement explains why the cash balance changed over the period, split into operating, investing and financing activities. They connect: net income feeds both the cash flow statement and retained earnings on the balance sheet, and the cash flow statement's ending cash is the balance sheet's cash line.

Picture them as a film, a photo and a bank statement

The fastest way to keep them apart is what kind of picture each one is.

The reason you need all three is that profit and cash are not the same thing. A business can be profitable and run out of cash (customers have not paid yet), or have plenty of cash and be losing money (it just borrowed it). Each statement catches what the others hide.

One small business, one year

Abstract definitions only stick once you watch real numbers move. Here is the first year of a bike repair shop, Spoke and Chain. To keep the arithmetic visible, there are no taxes and the year starts with nothing.

During the year:

• The owner puts in 20,000 of her own money.
• The shop borrows 10,000 from a bank and repays 2,000 of it by year end. Interest paid is 600.
• It buys tools and equipment for 15,000, expected to last five years. That is depreciation of 3,000 a year.
• It buys 6,000 of parts and uses 4,000 of them on repairs. 2,000 of parts are still on the shelf.
• It does 40,000 of repairs. Customers have paid 35,000; a local delivery firm still owes 5,000.
• Wages and rent come to 22,000, all paid.
• The owner takes 3,000 out of the business as a dividend.

The income statement

Three things to notice. Revenue is 40,000 even though only 35,000 arrived, because the work was done. Only the 4,000 of parts used counts as an expense, not the 6,000 bought. And the 15,000 of equipment is not an expense this year at all; only this year's 3,000 slice of it, the depreciation, is.

The cash flow statement

Start from net income and correct it back to cash.

You can check the operating figure directly from the bank account: 35,000 collected, minus 6,000 for parts, minus 22,000 for wages and rent, minus 600 interest, is 6,400. Same answer. Interest sits in operating activities here, which is the usual US GAAP treatment; under IFRS a company may choose to show it under financing instead.

The balance sheet at 31 December

It balances. Retained earnings is the profit kept in the business: 10,400 of net income minus the 3,000 dividend.

The four lines that tie them together

This is the part exams test and the part worth drawing.

1. Net income (10,400) is the last line of the income statement and the first line of the cash flow statement.
2. Net income minus dividends (7,400) is the increase in retained earnings on the balance sheet.
3. Ending cash (16,400) on the cash flow statement is the cash line on the balance sheet.
4. Every other balance sheet change shows up as an adjustment on the cash flow statement: the 5,000 owed by customers, the 2,000 of parts, the equipment at 12,000 after depreciation, the loan down to 8,000.

If you change one number in the story, all three statements move. Suppose the delivery firm pays its 5,000 on 30 December. Net income does not change, because the work was already counted. Operating cash rises to 11,400, ending cash to 21,400, and on the balance sheet cash goes up by 5,000 while money owed by customers drops to zero. Total assets stay at 35,400. Working through a change like this is the best test of whether you understand the links or have only memorised the formats.

What a visual version shows that a textbook page cannot

The textbook prints three tables on three pages, so the links are in the reader's head. A drawn explainer can put the three statements side by side and move the numbers between them. A scene list for a five-minute class video might be:

1. Spoke and Chain's empty shop and empty bank account. The question: did this year go well?
2. The income statement as a film strip: repairs coming in, parts, wages and rent, the tools slowly wearing out, ending at 10,400.
3. The twist: the bank account says 16,400, not 10,400. Why the two numbers differ.
4. The cash flow statement drawn as three pipes into and out of the bank account: operating, investing, financing.
5. The balance sheet as a weighing scale, 35,400 on each side.
6. The four arrows that link them, drawn one at a time.
7. The 30 December payment: one change, three statements moving.

Scene 6 is the point of the whole video. It is the picture students cannot get from three separate tables.

Make it

To make your own version for class, write the story first and let the numbers follow it.

1. 1

   Invent a tiny business

   A café, a bike shop, a tutoring service. Give it six to eight events in one year and keep the numbers round so the arithmetic can be said aloud.

2. 2

   Build the three statements on paper

   Check that the balance sheet balances and that the direct cash check matches the operating cash figure. If it does not balance, fix it before you script anything.

3. 3

   Write one paragraph per scene

   Follow the scene list above: story, income statement, the profit versus cash twist, cash flow, balance sheet, the links, one change. About 750 words is five minutes at 150 words a minute.

4. 4

   Paste it into openCanviz

   Choose Keep my wording so every number is said exactly as you wrote it, and pick the whiteboard style so each table and arrow is drawn as it is explained.

5. 5

   Check every number on screen

   Pause on each scene and compare every figure with your worked statements. Fix any wrong digit or arrow in the editor, scene by scene.

Once it is made, a video like this also works as a revision aid; how to turn class notes into a revision video covers using it before an exam. If you want to go further with money topics on video, how to make a finance explainer channel covers keeping figures checkable and dated.

Common questions

Which financial statement is most important? It depends on the question. Investors often start with the cash flow statement because cash is harder to dress up than profit. Lenders look hard at the balance sheet. But each one only makes sense alongside the other two.

Why is depreciation added back on the cash flow statement? Because it reduced net income without any cash leaving the bank that year. The cash left when the equipment was bought, and that is shown once, under investing.

Is the statement of changes in equity a fourth statement? In full company accounts, yes, and under IFRS it is required. It expands the equity section, showing owner investment, profit, dividends and other movements. For most introductory courses the three statements here are the core.

Can a profitable company go bust? Yes, if it runs out of cash. If Spoke and Chain's customers owed it 20,000 instead of 5,000, it would show the same 10,400 profit, operating cash of minus 8,600, and only 1,400 in the bank at year end, with wages and rent still due every month. That gap is exactly what the cash flow statement exists to show.