What are the key financial statements?

Ashish Agarwal
A free video tutorial from Ashish Agarwal
Corporate Finance Expert, Ex McKinsey, Ex BlackRock
4.3 instructor rating • 17 courses • 34,683 students

Learn more from the full course

Financial modeling: Build a forward looking integrated model

Learn financial modeling skills - Forecast Income statement, Balance Sheet & Cash Flows Statement for any company

02:11:56 of on-demand video • Updated March 2020

  • Parse through the Annual Report of any real company
  • Build historical financial statements of any real company
  • Forecast future financial statements of any real company
  • Link the Income statement, Balance sheet and Cash flows statement
  • Calculate Income Statement and Balance Sheet ratios
  • Blend macro-economic perspectives for growth forecasting
  • Extrapolate historical ratios for future
English Before we move to the Illustration for this modular course, Let's just lay out before you all the basic things that we need to know. The first thing that we all need to understand are the key Financial statements that every company needs prepare. As we have been talking there are three broad Financial statements that every company needs to prepare. The first is that Income statement, the second is the Balance sheet, and the third and often which goes unnoticed is that Cash flows statement. So broadly speaking these other Financial statements for any company is required to prepare. Between these Financial statements you can understand and derive a lot of information about the financial performance of the company, about how you can go about forecasting the Financial statements of the company. when we say that you want to prepare an integrated financial model, What we are essentially saying is that we want to create a model that will help establish establish the linkages between the Income statement the Balance sheet and the Cash flows statement. What you will see in some time that all the three statements are interlinked with each other. That is we cannot create any of the statements without the other two. And hence this beautiful relationship that exist between the three Financial statements is what we will understand and capture in this modular course. The one thing you should remember though is that we are going to capture the forward looking Financial statements, that is we would like to prepare a forecast of Income statement Balance sheet and the Cash flows statement of a company. This will help you to understand from a analyst perspective what does the future of a company looks like. And this is what we are going to learn in this modular course. So what do these Financial statements tell us. First of all the Income statement, this is the first statement that any company prepares. The Income statement is a very simple statement that says how much profit does the firm made during a financial year. So this is a statement that starts with the revenues of a company and takes out all the costs, what direct and indirect to tell you the overall profit of the company. If you want to understand much more about how the Income statement is prepared and what are the different components of the Income statement, you can go back and check out the previous modules of this course. The second statement is the Balance sheet. Now the Balance sheet has two sides. The Assets side and the Liabilities side. The asset side of the Balance sheet tells us, what is the firm owns at the end of the year. So this is really the assets that the firm has in the business. The liability side on the other hand tells us what does the firm owes at the end of the financial year. So the Balance sheet is a statement that lists out the assets and liabilities of a Firm. As we have also seen and as you all know by now the assets and liabilities should always match for a firm. This holds true not only for historical Balance sheet, but as well as the forward looking Balance sheet which we intend to prepare in this modular course. And finally the Cash flows statement, As the name suggests that Cash flows statement is a statement that tells us how much cash was generated during the year. Typically there are difference components of the Cash flows statement, that is cash flow from operations, Cash flows from financing, and that Cash flows from investing. We will look at each of these three components when we prepare the Cash flows statement. The one thing you should remember is that most analysts ignore the Cash flows statement when they prepare a forward looking financial statement. That is a huge normally in our understanding and this is one of the most important statement, that you should always prepare when forecasting an Income statement and Balance sheet. We will talk about this in much more detail when we go through that Illustration that we have before us in this course. So just to recap on the basics, there are three Financial statements that we will prepare. The Income statement, Balance sheet, and the Cash flows statement. The three Financial statements are inter linked . You cannot make one financial statement without the others. So we've established those linkages between three Financial statements, and the Cash flows statement isn't often understated statement yet a very powerful statement. So with this basic stuff in mind we can now proceed with Illustration that will help us to cement our understanding on these basic principles.