Understanding Balance Sheet Basics

There’s a puzzling fact about financial statements. Maybe you’ve noticed it.

Give a company’s financials to a first-time entrepreneur, and the first thing he will turn to is the income statement. Entrepreneurs know that a company has to make a profit. Maybe he has worked in other companies and has had P&L responsibility. Or maybe this is his first business experience, and he knows revenue has to exceed expenses. He believes that the income statement is the best record of a company’s financial performance. So that’s what he looks at first.

Now try giving the same set of financials to a banker, an experienced investor, or maybe a veteran entrepreneur. The first statement this person will turn to is invariably ...

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