Income statement, balance sheet and cash flow from raw numbers

Try it

Paste your revenue, expenses and closing balances for two periods, and askROI lays out the income statement, balance sheet and cash flow statement with the numbers that need a second look. The button opens a chat with a worked example filled in, so you can swap in your own figures.

A bank, an investor, an accountant or a grant application asks for "financial statements", and what you have is a bookkeeping export, a spreadsheet of invoices and a bank balance. The three statements they mean are built from exactly those numbers. This post shows what goes into each one, how they check each other, and what the AI Financial Statement Generator does with a set of raw figures.

What you need before you start

Gather two sets of numbers, one for the period you are reporting and one for the period before it. The comparison is what turns a list of figures into a story.

• Flows for the period: revenue, each expense category (people, contractors, rent, software, marketing), depreciation, interest and tax.
• Balances at the end of the period: cash, money customers owe you (receivables), equipment or other assets, money you owe suppliers (payables), and loans.

You do not need to know your equity. It is the balancing figure, which is the first thing the three statements teach you.

The income statement: what you earned and spent

The income statement covers a period of time: a month, a quarter, or a year. It starts with revenue, subtracts operating expenses to get operating income, then subtracts interest and tax to get net income.

Lay the two periods side by side with a change column. Revenue up 13.6% is a fact. Revenue up 13.6% while rent and salaries stayed flat is the reason profit doubled, and that is the sentence a reader wants.

Two ratios are worth adding under the table: operating margin (operating income divided by revenue) and net margin (net income divided by revenue). They let a reader compare a $184,000 quarter with a $2 million one.

The balance sheet: what you own and owe on one day

The balance sheet is a snapshot at the end of the period, not a flow. Assets (cash, receivables, equipment) sit on one side. Liabilities (payables, loans) and equity sit on the other, and the two sides are equal by definition.

That equality is why you can leave equity blank. Total assets minus total liabilities is the owner's equity. In the example, $161,600 of assets minus $57,500 of liabilities gives $104,100 of equity at the end of Q3, up from $78,000 a quarter earlier.

The cash flow statement: why cash moved

Profit and cash are different numbers. A customer who has not paid yet counts as revenue but not as cash. Depreciation reduces profit but no money leaves the bank. The cash flow statement reconciles the two, and the indirect method does it in four steps:

1. Start with net income.
2. Add back non-cash expenses such as depreciation.
3. Adjust for working capital: an increase in receivables uses cash, an increase in payables frees it.
4. Add investing and financing flows: equipment bought, loans repaid or taken, money put in or taken out by the owner.

The result must equal the change in cash on the balance sheet. When it does not, one of the inputs is wrong, and the gap tells you where to look.

What askROI does with the raw numbers

Here is the example from the button above: a design studio's Q3 figures with Q2 in brackets, pasted into the AI Financial Statement Generator with the note that owner equity is the balancing figure.

askROI's balance sheet and cash flow statement for the example: equity computed as the balancing figure, operating cash flow of 19,300, and a 6,700 unexplained equity inflow line that makes the cash reconcile

The income statement came back first, in the two-period layout with a change column and the margins underneath. The balance sheet followed with equity worked out for both quarters. Then the cash flow statement did the thing the three statements exist for: it did not tie.

Equity rose by $26,100, but net income was only $19,400. For the cash to reconcile, $6,700 had to come in from outside operations, most likely money the owner put in. askROI put that on its own line, labelled it as unexplained, and made it the first item to check.

askROI's five flags for the example, led by the equity gap, then no equipment spending, costs held flat, marketing and tax growth, and receivables and payables in a normal range

The other flags are the questions a good bookkeeper would ask: equipment fell by exactly the depreciation, so no purchases are implied; the margin gain came from costs holding still, which will not last if the extra work needs a hire; receivables grew in line with revenue, so collections look normal. Each one names the two numbers it compared.

Ask for a spreadsheet next and it builds the same statements as an Excel workbook with live formulas, which is usually what the bank wants attached.

The check before you send

Before any set of statements leaves your hands, run three checks:

1. Does the balance sheet balance? Assets must equal liabilities plus equity.
2. Does the cash flow statement end on the same cash figure as the balance sheet?
3. Can you explain every line in the change column in one sentence?

If one of them fails, go back to the raw numbers rather than adjusting a total. Or paste the figures into the AI Financial Statement Generator and let it find the gap: it lays out all three statements, flags what does not tie, and tells you which number to check first.