In order to measure an entity's performance. We really need to look at its financial statements. Let's use an example.

We could have a brand new entity or company setup and some shareholders invest some cash in the business. They buy some shares and cash gets invested.

Next up that cash is used to buy some operating assets. Maybe the company buys some machines. Already, we've had a lot of transactions go on. We've had shares purchased. We've then had cash spent and instead be replaced by Machinery. All of us will go in a balance sheet, which records the company's assets liabilities and equity.

Now the company starts to trade and the machine is used to make some products and the company sells those products. Luckily. It makes some profits fantastic news the assets produce profits.

All of those will be recorded in the income statement.

The income statement records any sales that are made less any expenses associated with those sales.

Great. So the company has made some profits, but that doesn't necessarily mean it's made any cash.

We have to have the customers actually pay their bills before we get any cash in that means we need a separate statement for cash flows and that's called the cash flow statement.

This will look at actual cash flows that come in. For instance when customers pay their bills and actual cash flows that go out.

Great, the company has got some cash now and now it needs to decide what to do with that cash.

It could reinvest that cash back into the business and just as what happened when the shareholders invested the cash went in it went on to the balance sheet any reinvested cash also goes on to the balance sheet.

Alternatively the company could decide to pay that cash to the shareholders. That will be returning it to shareholders as a dividend.

So there are a lot of transactions that happen in the company. And in order to measure its performance. We have to look at those three financial statements, the balance sheet, the income statement and the cash flow statement.