Financial Statements for Owners: income statement, balance sheet and ratios

Three statements, one business

In simple words

A business has three report cards. One says how the year went (did we earn more than we spent?). One is a photo of today (what do we own, what do we owe?). One follows the cash (where did the money come from and go?). Together they tell the whole story.

Before this course: Business Math 2: pricing models, cash flow and simple forecasts (course 2.31.2). You should already know contribution, break-even, cash-flow timing, scenarios with a switch cell and the PMT function. We use them here and do not repeat them.

Key facts

Income statement: revenue and costs over a period (a month, a year). The US SEC's beginners' guide calls the top line "gross revenues or sales" and the bottom line the company's net earnings or losses.
Balance sheet: a point in time (for example, 31 December). The SEC writes the equation as Assets = Liabilities + Shareholders' equity. The US Small Business Administration calls the balance sheet a "snapshot" of your business financials.
Assets are things the business holds that have value (cash, stock, equipment). Liabilities are what it owes (supplier bills, loans). Equity is what is left for the owners after liabilities.
Cash flow statement: money in and out over a period, in three parts (SEC): operating, investing and financing activities.
How they link (textbook rule): the year's net income from the income statement adds to equity on the balance sheet; money the owner takes out (draws) reduces it. The cash flow statement explains why cash on the balance sheet changed.
Profit is not cash. Depreciation lowers profit but uses no cash this year. Stock you bought but did not sell uses cash but is not yet a cost.

Our made-up shop, year 2 ($)	Amount
Cash at the start of the year	5,000
Operating activities (the shop's day-to-day)	+15,000
Investing activities (bought equipment)	-15,000
Financing activities (loan 15,000 in, 3,000 repaid, owner took 8,000)	+4,000
Cash at the end of the year	9,000

Check: 5,000 + 15,000 - 15,000 + 4,000 = 9,000.

Step by step

Take three sheets of paper (or three spreadsheet tabs) and title them Income statement, Balance sheet and Cash flow.
On each, write the date or period: "Year to 31 December" for income and cash flow, "At 31 December" for the balance sheet.
On the balance sheet tab, write the equation at the top: Assets = Liabilities + Equity.
On the cash flow tab, write the three headings: Operating, Investing, Financing.
Fill in the shop's cash flow from the table and add it up.
Draw arrows: net income goes to equity; closing cash goes to the balance sheet.
Check: opening cash plus the three parts equals closing cash (9,000).

Watch on YouTube

Financial statements: all the basics in 8 minutesAccounting Stuff · YouTube · youtube.com

Videos by other creators on YouTube, for reference. They are not made by or affiliated with The Future Market.

LESSON 01Three statements, one business

LESSON 01 / ANIMATED LESSON / AI VOICE00:00 / 01:10

Voice

Read the video script

[Host] "Every business has three report cards. Let's meet them."
[Text on screen: Income statement = a period] "The income statement covers a period. Did we earn more than we spent?"
[Text on screen: Assets = Liabilities + Equity] "The balance sheet is a snapshot of one day. What we own equals what we owe plus what is left for the owner."
[Text on screen: Operating, Investing, Financing] "The cash flow statement follows the money in three parts."
[Host] "Profit goes into equity. Cash ends up on the balance sheet. That is how they connect."

Try it now

For a business you know (real or imagined), list five numbers and say which statement each belongs to: this month's sales, cash in the bank today, a loan balance, the rent paid this year, money spent on a new oven.

ClaudeStuck? Copy a ready-made prompt for Claude

Copy this, open Claude, paste it, and Claude will walk you through the lesson step by step.

For a grown-up: Claude is for adults (18+). Copy this, paste it into Claude, and use the answer to explain the lesson to your child.

I'm learning "Financial Statements for Owners: income statement, balance sheet and ratios" on The Future Market. Lesson 1: "Three statements, one business".

What the lesson teaches:
- Income statement: revenue and costs over a period (a month, a year). The US SEC's beginners' guide calls the top line "gross revenues or sales" and the bottom line the company's net earnings or losses.
- Balance sheet: a point in time (for example, 31 December). The SEC writes the equation as Assets = Liabilities + Shareholders' equity. The US Small Business Administration calls the balance sheet a "snapshot" of your business financials.
- Assets are things the business holds that have value (cash, stock, equipment). Liabilities are what it owes (supplier bills, loans). Equity is what is left for the owners after liabilities.
- Cash flow statement: money in and out over a period, in three parts (SEC): operating, investing and financing activities.
- How they link (textbook rule): the year's net income from the income statement adds to equity on the balance sheet; money the owner takes out (draws) reduces it. The cash flow statement explains why cash on the balance sheet changed.
- Profit is not cash. Depreciation lowers profit but uses no cash this year. Stock you bought but did not sell uses cash but is not yet a cost.
- Our made-up shop, year 2 ($) - Amount

The exercise I'm working on:
For a business you know (real or imagined), list five numbers and say which statement each belongs to: this month's sales, cash in the bank today, a loan balance, the rent paid this year, money spent on a new oven.

I'm stuck. Please:
1. Explain the main idea in plain, simple words with one everyday example.
2. Walk me through the exercise one small step at a time. Ask me what I've done so far before giving the next step.
3. Don't just give me the final answer. Help me do it myself, and check my work when I share it.

I'm a parent helping my child (about 8 years old) with a lesson called "Three statements, one business" from the course "Financial Statements for Owners: income statement, balance sheet and ratios".

Here's what the lesson says:
A business has three report cards. One says how the year went (did we earn more than we spent?). One is a photo of today (what do we own, what do we owe?). One follows the cash (where did the money come from and go?). Together they tell the whole story.

The activity:
For a business you know (real or imagined), list five numbers and say which statement each belongs to: this month's sales, cash in the bank today, a loan balance, the rent paid this year, money spent on a new oven.

Please explain this so an 8-year-old understands: short sentences, a fun everyday example, and no hard words.
Then give me 3 simple questions I can ask my child to check they understood, and a way to do the activity together, one tiny step at a time.

Open Claude

Sources

US SEC, Beginners' Guide to Financial Statements: www.sec.gov/about/reports-publications/beginners-guide-financial-state
US Small Business Administration, Manage your finances: www.sba.gov/business-guide/manage-your-business/manage-your-finances

My notes

I learned this