Have you ever wondered how people figure out whether a company is doing well or struggling? Whether it’s a fast-growing Indian startup or a local kirana shop expanding into multiple branches — how do you know if they are actually making money or just creating hype?
The answer lies in a set of documents called financial statements.
Think of financial statements as a company’s report card, a health report, or even a passport that tells the world about its financial journey. For many beginners, these reports might seem scary — full of numbers, technical terms, and complex tables. But don’t worry! Once you understand the basics, they’re actually quite easy to read — and extremely powerful.
Whether you’re an investor in Indian stocks, a small business owner, a CA student, or just someone curious about business — understanding financial statements is an essential skill.
In this detailed guide, we’ll cover:
The 3 main types of financial statements
What they show
How to read them with real-life Indian examples
Key financial ratios you should know
A glossary of simple terms
Who uses financial statements and why
Let’s dive in!
Part 1: The Three Main Types of Financial Statements
Every company — from Reliance Industries to your local bakery — tells its financial story through three major documents:
1. The Income Statement
2. The Balance Sheet
3. The Cash Flow Statement
Let’s look at each in detail.
This is like watching a movie of the company’s performance over a period of time (like one quarter or one year).
Purpose: It shows how much money the business made, spent, and finally earned as profit.
In India, it’s also called the Profit & Loss Statement (P&L). It’s like a cricket scorecard showing runs (income), wickets lost (expenses), and final score (net profit).
Key Sections in an Income Statement:
Revenue / Sales (Top Line)
This is the total money earned from selling goods or services.
Example: If “Ravi’s Sweets” in Delhi sells Rs 10 lakhs worth of sweets in Diwali season, that’s their revenue.
Cost of Goods Sold (COGS)
This is the direct cost to produce the goods/services sold. For Ravi’s Sweets, it includes cost of milk, sugar, dry fruits, packaging, etc.
Gross Profit
= Revenue – COGS
This shows profit before paying other expenses like rent or salaries.
Operating Expenses (SG&A)
These are expenses for running the business (not directly for making the product). This includes:
Salaries of employees
Rent of shop/office
Marketing
Electricity bills, etc.
Operating Profit (EBIT)
= Gross Profit – Operating Expenses
This shows the profit from main business operations (before interest or tax).
Net Profit (Bottom Line)
= Operating Profit – Interest – Taxes
This is the final profit after all expenses. It’s the number investors and owners care about most.
Example:
Let’s say Ravi’s Sweets had:
Revenue = Rs 10,00,000
COGS = Rs 4,00,000
Gross Profit = Rs 6,00,000
Operating Expenses = Rs 3,00,000
Operating Profit = Rs 3,00,000
Interest = Rs 50,000
Tax = Rs 40,000
Net Profit = Rs 2,10,000
2. The Balance Sheet – Company’s Financial Snapshot
Unlike the Income Statement which shows performance over time, the Balance Sheet is a snapshot on a particular date — like 31st March (end of Indian financial year).
Purpose: It shows what the company owns, what it owes, and how much is left for the owners.
The golden equation of balance sheet is:
Assets = Liabilities + Shareholders’ Equity
Let’s break this down:
Assets (What the Company Owns)
These are resources that have value. Assets are of two types:
Current Assets (can be converted to cash within 1 year):
Cash
Accounts Receivable (money customers owe)
Inventory (stock of goods)
Non-Current Assets (used for long-term operations):
Buildings
Machinery
Land
Patents or software licenses
Liabilities (What the Company Owes)
These are the debts and obligations.
Current Liabilities (due within 1 year):
Bills payable
Salaries payable
Short-term loans
Non-Current Liabilities (due after 1 year):
Long-term loans
Bonds or debentures
Shareholders’ Equity (Owner’s Share)
This is the amount the owners/shareholders truly own.
= Total Assets – Total Liabilities
Includes:
Share Capital
Retained Earnings (profits kept in business instead of giving as dividends)
3. Statement of Cash Flows – Real Money Movement
Even if a business is profitable, it can still go bankrupt if it runs out of cash. This is where the Cash Flow Statement becomes important.
Purpose: It shows how much actual cash came in and went out during a time period.
Cash flows are divided into 3 parts:
Operating Activities
Cash from core business like selling goods/services, paying suppliers, salaries, etc.
Investing Activities
Cash spent or received from buying/selling assets like buildings, equipment, or other companies.
Financing Activities
Cash related to loans, equity, or dividends.
Example:
If Ravi took a Rs 5 lakh loan, bought a delivery van for Rs 2 lakh, and earned Rs 3 lakh from sales — these would be shown under financing, investing, and operating sections respectively.
Part 2: How to Analyse Financial Statements – Key Ratios
Now that you know the three financial statements, let’s look at how to make sense of the numbers using simple financial ratios.
Profitability Ratios
1. Net Profit Margin
= (Net Profit / Revenue) × 100
Shows how much profit is earned on every Rs 1 of sales.
Example: If Net Profit = Rs 10,000 on Sales = Rs 1,00,000 → Margin = 10%
2. Gross Profit Margin
= (Gross Profit / Revenue) × 100
Tells you if your product/service is profitable before overhead costs.
Liquidity Ratios
1. Current Ratio
= Current Assets / Current Liabilities
Tells if a company can pay its short-term bills.
> Ideal is above 1.5 in India.
Solvency Ratios
1. Debt-to-Equity Ratio
= Total Liabilities / Shareholder’s Equity
Shows how much the company relies on borrowed money.
> Ratio below 1 is considered safer in India.
Efficiency Ratios
1. Inventory Turnover
= Cost of Goods Sold / Average Inventory
Tells how fast stock is sold and replaced.
> Higher is better — shows strong demand and less dead stock.
Part 3: Glossary – Simple Accounting Terms You Should Know
Term Meaning
GAAP: Standard accounting rules (India follows Ind AS)
Depreciation: Spreading the cost of fixed assets over years
Amortization: Same as depreciation, but for intangible assets
Accounts Receivable: Money customers owe
Accounts Payable: Money company owes suppliers
Working Capital: Current Assets – Current Liabilities
EBIT: Earnings before Interest & Tax
Part 4: Who Uses Financial Statements in India?
1. Investors
To decide whether to buy or sell a stock. Indian retail investors on platforms like Zerodha, Groww, or Upstox use P&L and balance sheets to judge company performance.
2. Banks & NBFCs
To decide whether to give a business loan. They check cash flow and debt levels.
3. Management/Founders
To take decisions on expansion, cost-cutting, or launching new products.
4. Suppliers & Creditors
To check if the business is reliable and can pay on time.
5. Employees & Job Seekers
To understand the financial health of the company before joining.
6. Regulators & Tax Authorities (like SEBI, RBI, and Income Tax Department)
To ensure compliance, fraud prevention, and transparency.
Conclusion: Why You Should Learn Financial Statements
Financial statements are not just for accountants or MBA students — they are for everyone.
Want to invest in Indian stocks like TCS or HDFC Bank? Understand financials.
Running a small business in Ahmedabad or Lucknow? Read your P&L and cash flow.
Applying for a loan for your startup? Know your balance sheet.
When you understand how to read financial statements, you get a clear view of how a business is doing. You no longer depend on hearsay, tips, or media hype.
Financial literacy is a superpower in today’s world — and this guide is your first step.
Final Tips:
Download annual reports of Indian listed companies from exchanges websites NSE, BSE.
Use free tools like Ticker Tape or Screener.in to see ratios clearly
Always read financial notes — they often contain important details
Compare at least 2–3 years of data to see trends
Start today. Open a balance sheet. Decode it. Understand the story. And become financially smarter — one number at a time.
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