- Hi, friends. Welcome back. Today, we're going to talk about something super exciting, financial statements. Yes! So I'm going to take you step by step to understand what goes on each one of them, how they work together, how to read them, and why people even care.

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Financial statements are pretty much the story of your business. Financial statements are usually posted monthly, quarterly, sometimes annually. But regardless of when they're posted, they provide a picture, a beautiful picture of what your company has done, and in some cases, what your company will do over the period of time. All right?

So the very first financial statement that we're going to talk about is the income statement. We always start with the income statement, because it's basically showing your operations. What's happening through the flow of your business over a period of time.

You're going to have your revenue on your finance-- on your income statement, which your revenue, of course, is all the money that's coming in. It's like your money is just doing this and this and this and that, all right?

Then you also have your expenses. That's all the money you're doing this. The goal is to do this a lot more than you do that, right? You don't want to give away too much of your money, because then, when you take your revenue and you subtract your expenses, you want to have a net income and not a net loss. You want to have money left over.

Because if I am like an investor and I'm looking at your business and thinking about investing, I want to see that you know how to make money, which is very important, but also and equally as important, you have to be able to keep that money, right? It's like you can't just always spend all of that money.

So you take your revenues, minus your expenses, and you get your net income. That is your income statement. The second statement is the statement of retained earnings, which some people also like to refer to it as the statement of equity. Essentially, that's what it is. It's an equity statement.

You start with your beginning equity from the last period-- if this is the very first one, then that just means it's zero, because you have no equity. And then you're going to add your net income, which we just talked about net income on the income statement, right? So that is how these two statements fit together.

Your income from the first statement, your income statement, is going to flow down and show up on your statement of equity, your statement of retained earnings. So you take your beginning balance, add your income, and then you're going to subtract your dividends or any withdrawals that have been made. Any money that has been withdrawn from your company in the in the form of dividends, or if you're an individual sole proprietor, then that may be a withdrawal of some kind.

All right. So you take your beginning balance, your net income, your dividends, and then you're going to have your ending balance, all right? The statement of equity is the best and the shortest, the easiest statement to remember, because it's just short and sweet. It's always the same thing.

Our income statement can get a little more intricate. Some of our other statements, they get a little more detailed. But this one, it is what it is. It's always like four lines. All right, that's the second income-- the second financial statement.

The third financial statement is your balance sheet. Your balance sheet. The way that you're going to calculate this is assets equal liabilities plus equity. Hmm, we've heard that before, haven't we? Yeah, I think we have. All right. So assets equal liabilities plus equity. That is the balance sheet.

So that pesky old equation that we've been talking about over and over again, it's showing up again. It is the balance sheet equation, all right? So the way that is usually presented is we have our assets at the top. We total all of them up. We total all of our assets up. And then below that, we will have our liabilities plus equity.

So you're going to want to make sure that your total assets equal your total liabilities plus equity. If they do not, something's wrong. You did something-- you went left when you should have went right, like we said before. And you just messed something up, like I just did with my speech.

All right, so what we're going to do, so we're going to keep on going on. So we have our assets equal liabilities plus equity. Remember we have that ending balance from our statement of equity? Well, that's going to come down and show up in our balance sheet, all Right?

That's going to show up in the equity statement of our balance sheet. It's either going to be the equity account, the retained earnings account, however you're presenting your information, that's where it's going to show up. So we just went through the first three financial statements, all right? And each one of those have kind of looped together and kind of connected.

So now we talk about the fourth and final financial statement. That is the statement of cash flows, all right? The statement of cash flows a little different from the rest. It's kind of like a free spirit. I like, you know, it's like a free spirit. It's just kind of out there floating along by itself.

The statement of cash flows is following the flow of your cash, right? So remember, we're accounting. That means we follow the accrual basis of accounting, which says that we track our revenues and expenses as they are earned and they are spent, or owed, as opposed to tracking the cash.

So this statement of cash flows is for those people who are like, nah, forget all that. I want to know where my cash is going and how it's coming in and where it's going out, all right? So this statement of cash flows are for you. That's for you, if you want to know where your cash is going.

All right. The way this calculation is going to go is you're going to have your operating activities. You're going to add to that your investing activities, and you're going to add to that your financing activities. And then you're going to get to the bottom, and you're going to have your beginning cash.

Then from all those operating investing and financial activities, you're going to have some type of change in cash. Either cash is going up or cash is going down. And you're going to add that to your beginning cash. So you take your beginning cash, add the change, up or down, and then you're going to have your ending cash.

Your ending cash should tie back to your cash amount on your balance sheet. So the cash flow statement is a little different, because it doesn't just flow like downward, but it comes back to the balance sheet once again.

And so like all of these go a lot deeper, but that's a really good summary to get you started. One last thing before we get out of here is that each of these financial statements, except for one, are for period of time. The income statement, the statement of retained earnings, or statement of equity, and the statement of cash flows cover a period of time.

It's like a month. Like how did you do over the course of this month? And things like that, all right? So those three are over a course of time. The balance sheet is the only statement that is for a snapshot in time. It's for that day, that moment in time, because cash can be different at different parts of the day.

So typically, what's going to happen is you're going to have a solo date at the top of the balance sheet, whereas everything else will say for the period ended in so-and-so, all right? The balance sheet will just be the date. And I think that's it.

If you think of anything else that maybe I left off, then please, please leave me a comment, ask questions. I'm super open to answering questions. Like, comment, share. And make sure you subscribe if you haven't already.

And before we get out of here, we're going to do our Nance Stance. And go ahead and do our dance so that we can get out of here. See you next time.

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