Profit & Loss Account, Cash Flow Statement, and Balance Sheet Explained
Introduction
If you’re serious about stock market investing, understanding a company’s financial statements is crucial. In this guide, we’ll break down the three core financial statements — Profit & Loss Account, Cash Flow Statement, and Balance Sheet — in simple terms.
1. Profit and Loss Account (Income Statement)
Definition:
The Profit & Loss (P&L) account shows a company’s revenues, expenses, and profits over a specific period (quarter/year).
Key Sections:
- Revenue/Sales: Total income from operations.
- Cost of Goods Sold (COGS): Direct costs to produce goods.
- Operating Expenses: Salaries, rent, utilities, etc.
- Operating Profit (EBIT): Earnings before interest and taxes.
- Net Profit: Final profit after tax and all expenses.
Why it matters:
It tells you whether a company is making money or not.
Example:
Total Revenue: ₹100 Cr
COGS: ₹60 Cr
Operating Profit: ₹20 Cr
Net Profit: ₹10 Cr 2. Cash Flow Statement
Definition:
The Cash Flow Statement tracks real cash moving in and out of the company. It’s divided into three parts:
Types of Cash Flows:
- Operating Activities: Core business income and expenses.
- Investing Activities: Buying/selling assets like equipment or investments.
- Financing Activities: Loans, debt repayment, issuing shares.
Why it matters:
A company may show profit but still face cash shortages. This statement shows if the business is actually generating cash.
Example:
Cash from Operations: +₹15 Cr
Cash from Investing: -₹5 Cr
Cash from Financing: -₹3 Cr
Net Cash Flow: ₹7 Cr
3. Balance Sheet
Definition:
The Balance Sheet shows the company’s financial position at a specific date. It lists its assets, liabilities, and shareholders’ equity.
Formula:
Assets = Liabilities + Shareholders’ EquitySections:
- Assets: Cash, inventory, buildings, receivables.
- Liabilities: Loans, credit, unpaid bills.
- Equity: Owners’ share (including retained earnings).
Why it matters:
It tells you what the company owns and owes. A strong balance sheet indicates stability.
Example:
Total Assets: ₹100 Cr
Total Liabilities: ₹40 Cr
Shareholder Equity: ₹60 Cr Relationship Between the Three
| Statement | Purpose | Time-Based or Static |
|---|---|---|
| Profit & Loss | Measures profitability | Over a period |
| Cash Flow | Tracks actual cash movement | Over a period |
| Balance Sheet | Shows financial position | At a point in time |
👉 All three together give a complete picture of a company’s health.
Why Investors Should Care
- P&L shows how profitable a company is.
- Cash Flow shows liquidity.
- Balance Sheet shows financial strength.
By analyzing all three, investors can detect red flags, spot opportunities, and make informed decisions.
Conclusion
Financial statements aren’t just for accountants. They are a powerful tool for investors. Once you understand how to read them, you can evaluate any company like a pro.
Bonus Download:
📄 Download Our Free Financial Statement Analysis Template
