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Understanding
Financial Statements
By Geni Whitehouse, CPA
Countess of Communication

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Imagine your business is a tree.

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Imagine your business is a tree.
A fruit-bearing tree.

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Imagine your business is a tree.
A fruit-bearing tree.
Like an apple tree.

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This is your business.

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The income statement measures the fruits of
your business efforts.

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Like a tree, your business produces an
annual yield...

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...that gets reset every year.

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The Income Statement
starts at zero at the beginning
of every year
and measures the
annual yield.

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Profit =
Revenue – Expenses
Above the line

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Department Focus
Bottom Line
Profit =
Revenue – Expenses
Above the line

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At the end of each year,

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At the end of each year,
net earnings (or Net Income) is
added to

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At the end of each year,
net earnings (or Net Income) is
added to
Retained Earnings on the
Balance Sheet.

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At the end of each year,
net earnings (or Net Income) is
added to
Retained Earnings on the
Balance Sheet.

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The Balance Sheet is a picture in time.

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The Balance Sheet is a picture in time.
It measures the cumulative result of your business
efforts.

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The Balance Sheet is a picture in time.
It measures the cumulative result of your business
efforts.
It sustains your business
over the long haul.

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A tree can not bear fruit
without the support of a strong trunk.

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A business can not produce annual Net Income
without a solid Balance Sheet.
A tree can not bear fruit
without the support of a strong trunk.

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The Balance Sheet measures what you own
and what you owe.

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The Balance Sheet measures what you own
and what you owe.
What you own is called your Assets.
What you owe is called your Liabilities.

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The equity section is the difference between
the two.
Assets – Liabilities = Equity

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The equity section is the difference between
the two.
Assets – Liabilities = Equity
Equity approximates
the net value of your
business.
Equity is sometimes called Net Worth.

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If you slice open the trunk of a tree,
you can read the story
of each year
in its life.

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You will find lean years...
...with little or no Net Income.

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And strong years...
...with plentiful Net Income.

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Those rings are like the equity
section of the Balance Sheet.

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Those rings are like the equity
section of the Balance Sheet.
Accumulated Retained Earnings
=
Equity

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Equity =
Assets – Liabilities

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What
you
Own
Equity =
Assets – Liabilities

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What
you
Own
What
you
Owe
Equity =
Assets – Liabilities

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What
you
Own
What
you
Owe
Accumulated Earnings
Equity =
Assets – Liabilities

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Without water, no tree can survive for long.
No business can survive without cash.

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The Cash Flow Statement
shows
where the water went
in your business.

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How much cash
was consumed
by the Income
Statement?
Income
Statement

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How much cash
was consumed
by the Income
Statement?
Income
Statement
Balance
Sheet
How much cash
was consumed
in growing
the Balance Sheet?

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The Cash Flow Statement
connects
the Income Statement
to
the Balance Sheet.

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The Cash Flow Statement
connects
the Income Statement
to
the Balance Sheet.
The answer is on the Statement of Cash Flows.
“If I produced
Net Income this
year, where did the
money go?”

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Net Increase (Decrease) (3,700)

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Net Increase (Decrease) (3,700)
...keeps the business
running
Operating cash
flow ...

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Net Increase (Decrease) (3,700)
...keeps the business
running
Operating cash
flow ...

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Income
Statement

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Income
Statement
Balance
Sheet

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Income
Statement
Balance
Sheet
Statement of
Cash Flows
Success in
business
requires a
focus on all
three
financial
statements.

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Concepts by Geni Whitehouse
Even a Nerd Can Be Heard
Artwork (if you can call it that) also by Geni Whitehouse.
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The End