Understanding Financial Statements

Hello, I am Umesh Tripathi, and we are learning the concepts of Fundamental Analysis. 
In this video, we are going to learn the basic concepts of financial statements — what they are, an introduction to the three core components of financial statements, and the basic differences between a cash flow statement, balance sheet, and income statement. 

A financial statement is a formal record of a company’s financial activities and overall position. 
For example, let’s say a company sells certain products, incurs certain expenses, and generates some profit at the end — all these financial activities are formally recorded in its financial statements. 

The main purpose of financial statements is to evaluate the overall financial performance of a company and based on that, make informed long-term investment decisions. They also ensure transparency and compliance, as listed companies are required to release financial statements at the end of each quarter. 
These statements are accessible to investors, management, and creditors, and help all stakeholders in decision-making. 

When it comes to the core concepts, there are three main components of financial statements: 

1. Profit and Loss Statement (Income Statement) 

2. Balance Sheet 

3. Cash Flow Statement 

We will discuss these in detail in later videos. Essentially, each talk about a different part of the business story — financial position, profitability, and cash movement. 

Profit and Loss Statement (Income Statement) 
The income statement records the revenue generated by the company from its underlying business, as well as the expenses incurred. At the end, it shows the net profit or loss, indicating whether the company is profitable or not. 
From the income statement, we can analyse elements like revenue, cost of goods sold, and operating expenses, to determine profitability. The net profitability figure tells us if the company is actually making a profit. 

Balance Sheet 
The balance sheet shows a company’s financial position at a specific point in time. It provides details of assets (what the company owns) and liabilities (what the company owes). The purpose of analysing a balance sheet is to figure out whether the company is financially stable and capable of meeting both short-term and long-term debt obligations. 
It has three key sections: 

• Assets – what the company owns 

• Liabilities – what the company owes 

• Equity – the residual interest after liabilities are subtracted from assets 

Cash Flow Statement 
The cash flow statement records the cash inflows and outflows of the company. For example, running a business requires certain cash outflows (expenses) and generates certain inflows (sales receipts). There are various other sources of cash inflows, and all are recorded in the cash flow statement. 
A cash flow statement has three sections: 

• Cash from operating activities 

• Cash from investing activities 

• Cash from financing activities 

The cash flow statement measures liquidity and cash position, not just profitability. 
So, the income statement focuses on profitability, the balance sheet focuses on financial position, and the cash flow statement focuses on liquidity. 

A cricket analogy can help correlate the three: 

• If we analyse a batsman’s past performance by looking at total runs scored and his batting average, it’s like analysing revenue and profitability in an income statement. 

• If we assess players in a cricket team for their strength, stamina, and injury history (indicating they can remain fit in the coming months), it’s like a balance sheet showing a company’s assets and liabilities to judge financial stability. 

• If we track a player’s match-to-match consistency to decide if they will be useful in the future, it’s like using a cash flow statement to check liquidity and ongoing cash position. 

In this video, we learned what financial statements are, the three core statements (profit and loss, balance sheet, and cash flow statement), and how they help in making wise investment decisions. 
In the upcoming videos, we will study each in detail. See you in the next video. 

Investments in securities markets are subject to market risks. Please read all related documents carefully before investing.