Why Are Relationships among Financial Statements Important?

by Mary Jane, studioD

Companies use three types of financial statements to determine how well they are doing financially: cash-flow statements, balance sheets and income statements. Each of these statements provides detailed information about the financial standing of the company, which is more accurate when using all statements together. In addition, examining financial statements together provides tools to plan ahead for future finances.

Cash-Flow vs. Income Statements

Cash-flow statements track how the incoming funds are distributed and spent within a company. The income statements show how much the company is pulling in after resource wastes are subtracted. The relationship between these two documents is simple; if the company is spending more than it is earning, business owners must examine the income statements to see whether earnings are optimal or affected by massive wastes. Poor production may result in a larger waste than income, which affects the funding available for operation.

Month-to-Month Expenses

Business owners placing cash-flow and income statements beside one another over a period of a fiscal year can determine how the budgets within their companies have changed. For example, the cash-flow statements over a single year reveal how much a company is spending on necessary expenses and luxurious items, such as new computers for the office and car rentals for managers. The relationship between cash-flow statements is important as it shows well how a company manages available funds.

Comparative Balance Sheets

Comparative balance sheets show a company’s worth over several years. The total worth is calculated by adding up all assets and liabilities to get one large net worth. Liabilities must be subtracted from the owned assets for a total value. The operational funds revealed on the cash-flow statements and income statements may immediately affect the total worth since leftover profit from operations is categorized as cash assets.

Future Projections

Balance sheets, income statements and cash-flow statements all play a role when projecting a company’s financial standing over the next fiscal period. A balance sheet showing a negative net worth gives managers goals to increase the net worth by paying off liabilities or purchasing assets. Cash-flow statements are used to determine where budget cuts should be made to put funding aside to purchase assets for the net worth goal. The income statement shows how much a company is currently earning each month, which plays a role in the management of expenses and budgets.

About the Author


Photo Credits

  • Jupiterimages/Photos.com/Getty Images
Suggest an Article Correction