How to read financial statements

How to read financial statements. ⏱️TIMESTAMPS⏱️ 00:00 Three financial statements 01:05 How to read an income statement 07:41 How to read a balance sheet 16:06 How to read a cash flow statement The income statement tells you about the profitability of a company. Revenue minus expenses equals profit. Or: sales minus costs equals income. The income statement covers a specific period: a month, a quarter, or a year. It’s like a movie about profitability. The balance sheet tells you what a company owns (O W N), and what it owes (O W E). The balance sheet covers a specific date: month end, quarter end, or year end. It’s like a picture at a point in time of a company’s financial position. The cash flow statement tells you about the inflows and outflows of cash during a period. The cash flow statement is also like a movie, covering a specific period, but this time the topic is cash rather than income. Let’s see what we can learn by reviewing the 2025 #financialstatements of Microsoft. Here’s the income statement, also known as profit and loss statement, or P&L, for the fiscal year that ended on June 30, 2025. The income statement provides you with answers to important questions like “How much did they sell?” (the top line) and “How much did they earn?” (the bottom line). For Microsoft, 2025 revenue was $281.7 billion. 2025 net income was $101.8 billion. Remember that number! Not only is it important in the review of the income statement, but it also plays a role in both the balance sheet and the cash flow statement. When can you count something as revenue? “Revenue is recognized upon transfer of control of promised products or services to customers…” What is important to understand is that revenue is NOT the same as the amount of cash received from customers during the period. Read the balance sheet at the top level first, by category. What we own is split into current assets and non-current assets. What we owe is split into current liabilities, non-current liabilities and equity. Current assets are cash and other assets that are expected to be converted to cash within a year. Non-current assets are longer-term investments that cannot be converted into cash quickly. Current liabilities are amounts due to be paid to, or settled with, creditors within twelve months. Non-current liabilities are longer-term liabilities to be paid after the period of one year. And equity is the book value of the shareholder capital. Let’s populate those five balance sheet categories with the balances per June 30, 2025 for Microsoft. The balance sheet is balancing with $619B of assets on the left, and $619B of liabilities and equity on the right. The purpose of the cash flow statement is to explain how the cash balance at the start of the fiscal year (in the case of Microsoft July 1st) turned into the cash balance at the end of the fiscal year. What happened during the year is called cash flow, which gets classified into: cash from operating activities, cash from investing activities, and cash from financing activities. Cash from operating activities is for day-to-day operational cash inflows like customers paying the company, and cash outflows like paying suppliers and employees. Cash from investing activities is for cash outflows like capital expenditures and acquisitions. Cash from financing activities is for cash inflows from raising capital through issuing shares and taking out new loans, and cash outflows like paying dividends, buying back shares, and paying back loans. If we fill in the numbers for Microsoft for 2025, we see an opening balance of cash of $18.3B turn into a closing balance of $30.2B, a net cash inflow of $11.9B. $136.2B of cash inflow from operating activities. $72.6B of cash outflow from investing activities. $51.7B of cash outflow from financing activities. If you generate a LOT of cash from operating activities, then you can easily self-fund your investments, pay back loans, pay dividends, buy back shares, … and STILL end up with more cash in the bank at the end of the year! Each financial statement tells a story: about a company’s profitability, its financial position, and its in- and outflows of cash. Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In! Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through    / @thefinancestoryteller