---
id: "prereq-financial-statements"
type: "prereq"
source_timestamps: ["Reel 30"]
tags: ["accounting"]
related: ["concept-cashflow-vs-profit", "action-use-cashflow-statement"]
reason: "Required to understand why profit is a 'standard' and cashflow is 'actual'."
---
# Understanding of Financial Statements

## Prerequisite

Bowen assumes the viewer understands the basic structure and purpose of the three core financial statements:

- **Income Statement** (revenues, expenses, net income)
- **Balance Sheet** (assets, liabilities, equity)
- **Statement of Cash Flows** (operating, investing, financing activities)

And the distinction between:

- **Accrual accounting (GAAP)** — revenue recognized when earned, expenses when incurred.
- **Cash accounting** — revenue and expenses recognized only when cash moves.

## Why It's Required

Without this foundation, the central argument of [[concept-cashflow-vs-profit]] — that profit is a *standard* while cashflow is *actual* — does not parse. The action [[action-use-cashflow-statement]] is also non-executable without it.

## Suggested Resources

Any standard introductory accounting text (Wiley, Kieso). CFA Level I curriculum on financial reporting and analysis. Stephen Penman's *Financial Statement Analysis and Security Valuation* for deeper treatment.