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01 — Finance · Core

Accounting & Financial Statements

CTRT Learn · Core · 13 min read

Every company on earth — from a corner shop to a trillion-dollar tech giant — reports itself through the same three documents. Once you can read them, a company stops being a logo and a stock price and becomes a machine you can actually inspect. This lesson teaches you to read all three, and to see what they're really saying.

Why accounting exists

Accounting is a system for measuring economic activity so outsiders — investors, lenders, regulators — can understand a business without being inside it. It runs on double-entry bookkeeping: every transaction affects at least two accounts and must balance. Buy a $1,000 laptop with cash and cash falls by $1,000 while equipment rises by $1,000. Nothing appears or vanishes; it only moves. That discipline is what makes the numbers trustworthy and the statements tie together.

The balance sheet: what you own and owe

The balance sheet is a snapshot at a single moment, built on one unbreakable equation:

Assets = Liabilities + Equity

• Assets — everything the company owns or is owed: cash, inventory, equipment, buildings, money customers owe it.
• Liabilities — everything it owes others: loans, bills, bonds, wages due.
• Equity — what's left for the owners after debts are settled. It's the company's net worth.

The equation always balances because equity is defined as the leftover. Reading it tells you whether a company is solid or stretched: lots of debt against few assets is fragility; plenty of cash and low debt is resilience.

The income statement: are you making money?

Where the balance sheet is a photo, the income statement is a film of a period — a quarter or a year. It starts with revenue (sales) at the top and subtracts costs step by step down to net income (profit) at the bottom — which is why people say "the bottom line."

• Gross profit = revenue − the direct cost of making the product. Shows the basic economics of what they sell.
• Operating profit = gross profit − running costs (salaries, rent, marketing). Shows how well the core business operates.
• Net income = what's left after interest and tax. The final profit.

Watch the margins — profit as a percentage of revenue. A company keeping 25 cents of every sales dollar is a very different business from one keeping 2 cents, even if both are "profitable."

The cash flow statement: follow the money

This is the one beginners skip and professionals read first. Profit on the income statement involves judgement calls — when to record a sale, how fast to depreciate a machine. Cash does not lie. The cash flow statement strips away the accounting and shows the real movement of money, in three buckets:

• Operating — cash from actually running the business. The healthiest source. You want this positive and growing.
• Investing — cash spent on or earned from long-term assets, like buying equipment or another company.
• Financing — cash from raising money (loans, share sales) or returning it (dividends, debt repayment).

This is why "profit is an opinion, cash is a fact." A company can report a profit while bleeding cash — booking sales it hasn't been paid for — and quietly head for insolvency. The cash flow statement catches it.

How the three connect

The statements are one system, not three reports. Net income from the income statement flows into equity on the balance sheet and starts the cash flow statement. The ending cash on the cash flow statement is the cash line on the balance sheet. If someone manipulates one statement, the others usually expose the lie — which is exactly why analysts read all three together.

Reading like an analyst

Raw numbers mean little alone; ratios turn them into judgement, and you'll use these constantly in equity analysis later:

• Current ratio (current assets ÷ current liabilities) — can it pay its near-term bills?
• Debt-to-equity — how leveraged, and therefore how fragile, is it?
• Return on equity — how much profit does it generate on owners' money?
• Net margin — how much of each sales dollar becomes profit?

Compare a company to its own history and to its rivals. The story is almost never in one number — it's in the trend and the comparison.

Key terms

• Balance sheet — assets, liabilities, and equity at a point in time.
• Income statement — revenue down to net income over a period.
• Cash flow statement — real cash moving through operations, investing, financing.
• Margin — profit expressed as a percentage of revenue.
• Double-entry — every transaction recorded twice so the books always balance.

Next course — Corporate Finance & Valuation →

CTRT Learn is general education, not financial, legal, or tax advice. Nothing here is a recommendation to buy or sell any asset. CTRT is operated by Centrente, part of the Trancent world.