The three principal financial statements are:

· the profit and loss account

· the balance sheet

· the cash flow statements

These three statements are useful in understanding the financial health, strength and durability of a business. The profit and loss account is a performance statement as it measures profitability and the balance sheet shows the financial position of the business. The cash flow is different as it demonstrates a business’ ability to adapt financially.

The balance sheet and profit and loss accounts are derivative of accounting standards such as SSAPs, IFRS and GAAP to name a few, but the cash flow is a derivative of the hard cash movements that would have happened in the business during the financial year. The cash flow statement therefore demonstrates the quality of the profit on the profit and loss account and the quality of the financial position on the balance sheet.