The three financial statements, explained

The income statement shows revenue, costs and profit over a period. The balance sheet shows what the company owns, owes and the owners' equity on one date. The cash-flow statement shows where cash came from and went during the period. Profit and cash are different: a profitable company can still run out of cash if customers pay late.

Income statement (profit and loss)

It starts with revenue, deducts the cost of goods or services sold to give gross profit, then deducts operating expenses (salaries, rent, depreciation, marketing) to give operating profit, and finally finance costs and income tax to give net profit. Read it for margins: gross profit as a percentage of revenue tells you whether pricing covers direct cost.

Balance sheet (statement of financial position)

Assets equal liabilities plus equity. Assets are split into current (cash, customers, inventory) and non-current (fixed assets); liabilities into current (suppliers, taxes payable) and long-term (loans). Comparing current assets with current liabilities shows whether the company can meet its obligations over the coming months.

Cash-flow statement

It explains the change in cash in three groups: operating activities (the business itself), investing activities (buying or selling fixed assets) and financing activities (loans, capital, dividends). A company whose operating cash flow is consistently lower than its profit is usually financing its customers through credit sales or building up stock.

How the three connect

• Net profit from the income statement is added to retained earnings in equity on the balance sheet.
• The cash-flow statement starts from profit (indirect method) or from receipts and payments (direct method) and ends at the cash balance shown on the balance sheet.
• Depreciation reduces profit but not cash, which is one reason profit and cash differ.

Standards in Egypt

Companies in Egypt that must publish or have audited financial statements prepare them under the Egyptian Accounting Standards, which are largely based on international standards (IFRS). Which statements and disclosures your company needs depends on its legal form and size; confirm with your auditor.