Financial statements exist to allow outside investors to know where a company stands financially (Balance Sheet), what the company is producing in the way of return (Income Statement), and how the cash is being managed (Statement of Cash Flows).

Management is privy to what’s going on within the company but in most situations they would not have their positions without the capital support of outside owners. So, the action of management issuing financials to outside owners is a fiduciary responsibility recognized and mandated by the Securities and Exchange Commission.

The goal of an investor is to see his/her equity stake become more valuable. That equity stake is revealed on each successive balance sheet as time progresses. As revealed in my book, “Choose Stocks Wisely,” I largely use the balance sheet to tell me how the company resources (assets) have been managed to date and the amount of those resources in order to give me a basis for how much to pay per share of stock for my initial equity position.

After investing, the Income Statement’s real import kicks in since it describes the return being achieved period by period on my investment. The return achieved is what will be the driver behind an expectation of my invested capital increasing in worth as time goes on.

Finally, for a solid return on investment to be achievable over the longer term, a company must manage its assets efficiently and effectively (continually manage the balance sheet well) in a manner that translates into generation of future positive cash flows. The Statement of Cash Flows is there to help the investor discern the quality of the earnings revealed on the Income Statement and whether those earnings are actually translating into real cash flows (“earnings” are measured by an accounting basis known as “accrual accounting” and not on a cash basis of measurement).

Also, the Statement of Cash Flows will reveal whether cash being generated is actually benefitting stockholders first, or perhaps, in adverse fashion, deepening the pockets of corporate management. As the saying goes, “follow the money.”