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There are three financial documents that are critical in financial accounting:
- Balance Sheet - This is the personification of the accounting equation. It shows a snapshot in time of the firm's assets, liabilities, and owner equity.
- Income Statement - This is a record of business success over a period of time. In other words, are your assets growing faster than your liabilities?
- Statement of Cash Flows - This shows what's happening with your money. Where is coming from and where is it going.
Many new students get confused why the statement of cash flows matters. After all, as long as you have more assets than liabilities, you could always turn assets into cash. Unfortunately, sometimes it's hard to sell assets on short order to get the cash you might need to pay for things. Additionally, understanding where cash is coming from will often help managers better understand what the business is doing, but you'll learn more about that later.