Understanding financial statements

Every listed company is required to publish three core financial statements each quarter and year. Together they tell the full story of a company's financial health. Separately, each one answers a different question.

The income statement

The income statement answers: is this company making money?

It covers a period of time, typically a quarter or a full fiscal year, and shows every dollar earned and every dollar spent. It starts with revenue at the top and works down through costs until you reach net income at the bottom. That difference between revenue and net income, and the costs that explain it, is where most of the interesting analysis happens.

For Microsoft's (MSFT) fiscal year 2024, the income statement shows $245.1 billion in revenue and $88.1 billion in net income. Roughly 64 cents out of every dollar was spent on costs. Understanding which costs, and whether they are rising or falling as a percentage of revenue, is what reading an income statement involves.

The income statement also contains the profit figures that feed into most valuation ratios, including the earnings used in a price-to-earnings ratio.

The balance sheet

The balance sheet answers: what does this company own and owe right now?

Unlike the income statement, which covers a period, the balance sheet is a snapshot at a single point in time. It has two sides: everything the company owns (assets) and everything it owes (liabilities), with the difference being shareholders equity. That is what would theoretically be left for shareholders if the company settled all its debts today.

The two sides always add up to the same number. That is why it is called a balance sheet.

For Microsoft as of June 30, 2024, the balance sheet shows $523.0 billion in total assets against $243.0 billion in total liabilities, leaving $268.5 billion in shareholders equity. That $268.5 billion figure is the book value of the company, the accounting net worth used in price-to-book ratio calculations.

The cash flow statement

The cash flow statement answers: where did the cash go?

This is the one most readers skip, and often the one that matters most. A company can be profitable on paper but still run out of cash. The income statement follows accounting rules that do not always match real cash movements: revenue is recorded when earned, not when collected; some costs are spread across years rather than recognized when paid. The cash flow statement strips all of that away.

It has three sections. Operating activities shows cash generated by the core business. Investing activities shows cash spent on assets meant to last years, or received from selling them. Financing activities shows cash raised from debt or equity, and cash returned to shareholders through dividends or buybacks.

Microsoft's cash flow statement for FY2024 shows $118.5 billion in operating cash, even though net income was $88.1 billion. The difference comes mainly from depreciation and stock based compensation, accounting items that reduced the income statement profit without actual cash leaving the bank, plus deferred revenue, cash customers paid upfront before it counts as revenue.

Why all three matter together

No single statement tells the full story.

A company can show strong earnings on the income statement while quietly taking on debt on the balance sheet. Strong cash flow from operations can mask a business that is not growing. High profit margins can coexist with a balance sheet that is stretched thin.

Reading all three together closes those blind spots. The income statement shows what was earned. The balance sheet shows what was built up or borrowed to earn it. The cash flow statement confirms how much of that profit arrived as cash.

For a deeper look at each statement, the financial statements learning section walks through all three line by line.