"Financial Statements FAQ: Common Questions Answered"

I'm a complete beginner — which statement should I start with?

Start with the income statement: "revenue minus costs equals profit" matches everyday intuition. Then move to the balance sheet and the accounting equation (Assets = Liabilities + Equity). Finish with the cash flow statement to understand why profit and cash diverge. Once you have seen all three, shift your attention to how they connect — net income flows into retained earnings, and the net change in cash reconciles to the cash balance. Executing a dozen transactions in our interactive simulator usually teaches this faster than any textbook chapter.

Why can a company be profitable but short of cash?

Because the income statement uses accrual accounting: a credit sale is recognized as revenue — and profit — the moment goods ship, while the cash arrives only when the customer pays. A company growing fast on slow-paying customers, while paying upfront for inventory, can report healthy profits while its bank account drains. The test is the CFO-to-net-income ratio: persistently well below 1 means reported earnings are not turning into cash.

What is depreciation, and why is it called a non-cash expense?

Depreciation spreads the cost of a fixed asset over its useful life. The cash left the company at the moment the equipment was purchased (shown in investing cash flow); each year's depreciation charge merely allocates that historical outlay to expenses — no new cash leaves. That is why the indirect-method cash flow statement adds depreciation back to net income.

What is the difference between the direct and indirect method?

They differ only in how the operating section is presented; the total is identical. The direct method lists actual cash receipts and payments (collected from customers, paid salaries…) and is easy to read. The indirect method starts from net income, adds back non-cash charges and adjusts for working-capital changes, revealing exactly where profit and cash diverge. Most listed companies publish the indirect method. Our simulator lets you toggle between both views with one click.

Is this website free? Do I need to sign up?

Completely free, no registration. Both the interactive learning simulator and the US company financials viewer work immediately, in Simplified Chinese, Traditional Chinese, English and Spanish. Your session data stays in your browser; you can export a JSON snapshot and reload it later.

Where does the company data on the analysis page come from?

From the SEC's EDGAR database — the structured XBRL data of official 10-K (annual) and 10-Q (quarterly) filings, with no third-party processing in between. Coverage is US-listed companies: type a ticker such as AAPL, MSFT or TSLA, and choose annual, quarterly, or multi-period comparison modes.

Does learning financial statements actually help with investing?

Financial statements will not tell you whether a stock rises tomorrow, but they answer more important questions: How does this company make money? Are the earnings real cash or accounting constructs? Is the debt structure dangerous? Is growth organic or fueled by endless fundraising? Those judgments are the foundation of fundamental investing. When reading a real company, go balance sheet → income statement → cash flow statement, and always stretch the horizon to several years.

How exactly are the three statements connected?

Three links: (1) net income from the income statement flows into retained earnings on the balance sheet; (2) the indirect-method cash flow statement starts from net income and reconciles to operating cash flow; (3) the sum of the three cash-flow sections equals the change in the balance-sheet cash account. Every transaction propagates through these links, keeping all three statements consistent at all times.