What are the three primary financial statements and what does each show?

• A. Balance sheet shows assets, liabilities, and equity; Income statement shows revenues and expenses; Cash flow statement shows cash inflows and outflows.
• B. Income statement shows revenues and expenses; Cash flow statement shows cash movements; Balance sheet shows current assets only.
• C. Income statement shows revenues and expenses; Balance sheet shows assets, liabilities, and equity; Cash flow statement shows cash inflows and outflows.
• D. Cash flow statement shows net income; Income statement shows cash balance; Balance sheet shows equity changes.

Answer: (C)

The main idea being tested is understanding what each financial statement reports and why all three are needed to get a full picture of a company’s finances. The income statement shows a period’s revenues and expenses to determine net income or loss, illustrating profitability. The balance sheet provides a snapshot at a single point in time of what the company owns (assets) and what it owes (liabilities) plus the owners’ claim (equity), revealing financial position and solvency. The cash flow statement tracks cash movements during the period, breaking them into operating, investing, and financing activities to show how cash changed, which is essential for assessing liquidity.

These statements connect in important ways: net income from the income statement flows into equity on the balance sheet (retained earnings), and the cash flow statement explains why cash can differ from net income by adjusting for non-cash items and changes in working capital. So the option that describes the income statement as showing revenues and expenses, the balance sheet as showing assets, liabilities, and equity, and the cash flow statement as showing cash inflows and outflows is the best fit.