Learn · Lessons · Reading the numbers

One business, three views.

The income statement, the balance sheet and the cash flow statement aren't three separate reports. They are three views of the same business, wired together so that a change in one shows up in the others. Here are the wires, a model you can test them on, and a quick way to read a real annual report.

Concepts in this lesson
Retained earnings
All the profits a company has kept over its life, after losses and dividends paid; part of shareholders' equity.
Depreciation
An expense spreading a physical asset's cost, such as a machine's, over its years of use.
Free Cash Flow
The cash a business generated after paying its running costs and its investment in equipment, buildings and the like.
Every term in Table Talk

01Three views

Read any one alone and you can be fooled. A company can show a profit while running out of cash, or hold lots of cash it borrowed. Together they are much harder to argue with.

02The wires between them

  • Net income flows into equity. The year's profit, less dividends paid, is added to retained earnings on the balance sheet. The pizza shop's $37,500, less $10,000 of dividends, became $27,500 of retained earnings.
  • Net income starts the cash flow statement. The operating section begins with it and corrects for everything that wasn't cash.
  • Cash closes the loop. The cash flow statement's change in cash, added to last year's cash, must equal the cash on this year's balance sheet: $0 + $41,500 = $41,500.
  • Depreciation touches all three. An expense on the income statement, a reduction in equipment on the balance sheet, and an add-back on the cash flow statement, because no cash moved.
  • Working capital links the balance sheet to cash. A rise in receivables or inventory on the balance sheet is cash tied up; a rise in payables is cash kept for now.
  • Investing and financing change the balance sheet directly. Buying the oven turned cash into equipment; borrowing added cash and a loan.
At the table

Think of three records of one night: the session result, the count of your stack, and the log of every buy-in and cash-out. Win $500 and the result says +$500, the stack is $500 bigger, and the log shows whether it arrived as chips or as an IOU. If the three don't agree, someone has made a mistake, or is hiding one. Accounting is built so they always agree.

03Try it: post the transactions

Below are the pizza shop's books, starting from nothing. Pick an amount, then post transactions and watch all three statements move together. Two checks run after every one: the balance sheet balances, and the cash flow statement's total matches the cash on the balance sheet. Taxes and interest are left out to keep it simple, and each sale uses ingredients from stock worth 30% of its price, so buy some ingredients first.

Before you press anything, guess. Buying ingredients on credit: which statements move? (Two balance sheet lines, and two cash flow lines that cancel out.) Recording depreciation? (All three.) Catering on an invoice? (Revenue and receivables go up; cash doesn't move.)

To start, press "Post the opening sequence": owners put in $30,000, the shop borrows $50,000, buys a $60,000 oven and $6,000 of ingredients on credit, sells $10,000 of pizzas for cash, caters a $5,000 event on an invoice, and records $12,000 of depreciation.

After the opening sequence, the shop shows a loss of $1,500 on its income statement, yet its operating cash flow is +$10,000. The cash flow pane shows why, line by line: start from the −$1,500, add back $12,000 of depreciation that cost no cash, subtract the $5,000 invoice not yet paid and the $1,500 of ingredients still in the fridge, and add the $6,000 supplier bill not yet paid. That is the bridge from the cash flow lesson, live.

You can't make either check fail. That is double-entry bookkeeping: every transaction lands in two places, so the statements agree by construction. When a real company's don't, it's a misprint or a fraud.

04Reading an annual report in ten minutes

  1. Income statement, three years side by side. Is revenue growing? Are the margins holding, rising or slipping?
  2. Cash flow statement. Is operating cash flow close to net income, or falling behind it? What's left after capex? Where did the free cash flow go: debt, dividends, buybacks?
  3. Balance sheet. How much debt, against how much equity and cash? Are receivables or inventory growing faster than sales?
  4. The notes and the management discussion. Read the parts that explain whatever surprised you in the first three steps.

Three warning signs to look for together: profit rising while operating cash flow falls; receivables climbing faster than sales; dividends or buybacks paid with borrowed money.

05What a real statement looks like

  • Units once, at the top. "In millions, except per-share amounts" means 416,161 is $416.2 billion.
  • Negatives in parentheses. (14,264) means minus $14,264 million.
  • Years side by side, usually the newest first: three years for the income and cash flow statements, two for the balance sheet.
  • The company's own labels. Apple says "net sales" for revenue and "gross margin" for gross profit; the last balance sheet line reads "Total liabilities and shareholders' equity". The ideas are the ones in these lessons; only the names change.

06Where to find them

  • In the US, public companies file an annual report on Form 10-K, with audited financial statements, and a quarterly report on Form 10-Q, with unaudited ones. Both are free on the SEC's EDGAR system. In a 10-K, the statements are in Item 8 and management's discussion of them in Item 7.
  • In Canada, companies file their annual and interim financial statements and management's discussion on SEDAR+.
  • Most companies also post them on the investor-relations section of their own website, often with a slide deck that summarizes them.

Every stock report on this site summarizes the key figures from these statements in its metrics table.

07Read a real one: Apple

Put the three Apple boxes from the earlier lessons side by side and the wires show:

  • Cash ties out exactly. The cash flow statement starts fiscal 2025 with $29.9B of cash, adds $6.0B, and ends with $35.9B: the same $35,934 million shown as cash and cash equivalents on the balance sheet. That is cash Apple can spend tomorrow; the other $96.5B of the $132.4B in the balance sheet lesson sits in marketable securities, which the cash flow statement treats as investments bought and sold.
  • Profit to equity. $112.0B of net income flowed into equity; $90.7B of buybacks and $15.4B of dividends flowed out. In fiscal 2025 profit slightly outran the payouts, and the accumulated deficit shrank from $19.2B to $14.3B. But in earlier years buybacks and dividends often took out more than profit put in, which is why equity is small and retained earnings negative.
  • Profit to cash. Net income opens the cash flow statement. $24.5B of non-cash charges such as depreciation and share-based pay are added back, $25.0B of working-capital and other changes go the other way, and operating cash flow ends almost exactly where net income began.
  • Buybacks to earnings per share. Net of new shares issued to employees, the buybacks on the cash flow statement cut the share count by 2.3% over the year, which is why earnings per share rose faster than net income on the income statement.

Source: Apple Inc., Form 10-K for the fiscal year ended September 27, 2025, filed October 31, 2025, Item 8 (Financial Statements and Supplementary Data). Dollar figures in billions, rounded from the reported millions. Find it on SEC EDGAR.

The fine print, lesson edition. This page explains how financial statements fit together. It is education, not advice to buy or sell any security. The pizza shop is invented, and the model leaves out taxes and interest for simplicity; Apple's figures are from its own annual report, as cited, and are not a view on its shares.