Financial Statements Explained For Kids

Financial statements aren’t hard to understand.

Let me explain them in under 3 minutes:

1. The balance sheet shows what a business owns and owes at any moment.

2. The income statement shows how profitable the company is over time.

3. The cash flow statement shows the actual cash going in and out of the business.

1. The Balance Sheet:

Answers the question, “What does the company have, and what does it owe?”

A balance sheet is a snapshot of a company’s financial position at a specific point in time.

It shows:

• what a business owns (assets)
• what it owes (liabilities)
• what belongs to the owners (shareholder equity)

The key thing to know is that a balance sheet follows the simple formula:

Assets = Liabilities + Shareholder Equity

a. Assets = Liabilities + Shareholder Equity:

This makes sense when you think about it – a company has to finance or pay for its assets by taking on debt (liabilities) or getting investments from shareholders (equity).

Analyzing a balance sheet can show you:

• how much debt it has
• how financially stable a company is
• the company’s ability to grow and take on more opportunities

2. Income Statements:

It answers the question, “How much money is the company making?”

While a balance sheet shows a company’s financial position at a point in time, an income statement shows performance over a period of time.

It summarizes how much money a company brought in (revenue) and how much it spent (expenses) over time.

a. The key parts of an income statement are:

• Revenue – Money earned from sales of products and services

• Expenses – Operating costs like employee salaries, materials, advertising, etc.

• Profit/Loss – Revenue minus expenses gives you your final profit or loss

b. An income statement helps you understand how profitable a company’s operations are.

• Are expenses under control?
• Are sales growing or declining?

These questions can be answered by analyzing trends in the income statement over time.

3. Cash Flow Statements:

It answers the question, “How much money is the company generating, and how is it spending it?”

Cash flow statements show how cash enters and leaves a business through three main activities:

• Operating activities – Cash from day-to-day operations and expenses

• Investing activities – Cash used for investments and asset purchases

• Financing activities – Cash from loans, investors, stock issuances

a. While income statements show profitability, cash flow statements depict liquidity – a company’s ability to generate cash and meet financial obligations.

Positive cash flow indicates financial health and flexibility to pursue new projects or investments