Inflows, Outflows, Cashflows

If a balance sheet goes a company's financial state in this moment, the income statement tells you a little bit about how it got there. This statement might be ever so slightly more important than the others because it shows profitability.

The income statement shows a record of how much money the company took in as revenue and owes in expenses. The bottom line is net income, or profit. (And yes, the phrase "the bottom line" came from this. That's how important it is.)

When you look at an income statement, revenues should be increasing -- you want the company to sell more stuff to make more money. Expenses should generally be decreasing or staying the same; this is more about proportion, though. Expenses should grow proportionally with revenues, though this can be thrown off if the materials to make the company's products get more expensive beyond anyone's control.

Certain things on an income statement will be company-specific, so don't be surprised if not all ISs look the same way. For example, one company's interest expense might be higher than anothers because it pays a higher interest rate.

Ultimately, the income statement is about the profit sitting at the bottom. Net income should always be increasing, of course! But be mindful that the number fluctuates based on a variety of things, like the economy and the cost of materials.

Now, when I talk about "profit," I'm not necessarily talking about "cash." That's where the cash flow statement comes in.

If the balance sheet shows the company's financial state and the income statement shows profitability, then the cash flow statement shows where the money went in the midst of all that: where it went out the door, where it came in from, and how much of it remains.

Know that companies don't usually buy materials or property with cash, but with some type of debt, be it short-term or long-term. But they have to pay the debt, so they keep cash for that and for everyday expenses, like salaries.

Cash-rich companies have much more flexibility than debt-ridden ones, though. Apple, with all its cash, created devices that changed the world forever. Kodak, on the other hand, no longer has a prayer.

Keep an eye out for companies with lots of cash because, if they're not busy creating the Next Big Thing, they likely pay high dividends, which is essentially a tip to you for investing in their company. It's generally best to re-invest dividends in the company's stock because it increases your investment return over time. It's basically like investing with free money -- I can't think of anything that sounds better!

Next time, I'll bring all three statements together to show you how they work in action for Coach, Inc. You'll be back, I know! ;)