From now on, let's briefly introduce the three main financial statements that you'll encounter most often: the Income Statement, Balance Sheet, and Cash Flow Statement. These are referred to as the Income Statement, Balance Sheet, and Cash Flow Statement in English. Corporate financial analysis can be said to be based on these three statements, as they contain a wealth of important information.
First, the Income Statement shows a company's performance over the course of a year. Of course, depending on the company, it may also be prepared semi-annually or quarterly. In any case, it includes everything from revenue to operating profit, and ultimately net income, which most rationally shows a company's performance. Therefore, the Income Statement is prepared based on accrual accounting, as explained earlier, and thus differs from actual cash flow.
The second is the balance sheet. The balance sheet shows the financial position at a specific point in time. It can be said that it is where all of the company's performance to date is accumulated. Therefore, unlike the income statement or the cash flow statement, the balance sheet is usually prepared as of the last day of the reporting period. Most companies around the world prepare it as of December 31, but in Japan, it is typically prepared as of March 31, and there are also various other months, such as June or August, used around the world. The biggest feature of the balance sheet is that assets are recorded on the left side, and liabilities and equity are recorded on the right side. And the numbers on the left and right always have to match. This is why the balance sheet is called a "Balance Sheet".
To analyze a company, both the income statement and the balance sheet are important. Imagine you're looking for a partner with identical appearance and personality, but different financial status. The first person earns $1 million a year, and the second person earns $50,000. Naturally, the first person seems more attractive. However, the first person has assets of $10,000, while the second person has accumulated assets of $10 million. So, who is more attractive? Depending on preferences, it can vary, but companies are the same. For investment decisions, both the income statement and the balance sheet must be analyzed carefully.
Finally, the cash flow statement also shows a company's performance over the course of one year, but it is based on cash flows. One additional point to note is that, while we have seen cash flow statements created like a personal budget, most cash flow statements are actually reconstructed from the results of the income statement and balance sheet. You may not understand this fully right now, but I will explain it in more detail later. The important thing is that from now on, these three financial statements always move together organically. Understanding this is where many people struggle with accounting, so let's study it carefully.
