The Daily Technical #35: What do the phrases “above the line” and “below the line” mean?

Good morning. Welcome to the 35th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Walk me through the three financial statements.

The three financial statements work together to give a complete picture of a company's financial health.

The income statement shows a company's profitability over a specified period, typically quarterly and annually. The beginning line item is revenue and upon deducting various costs and expenses, the ending line item is net income. This feeds into the balance sheet’s retained earnings and is the starting point for the cash flow statement.

The balance sheet is a snapshot of a company's resources (assets) and sources of funding (liabilities and shareholders' equity) at a specific point in time, following the fundamental equation: Assets = Liabilities + Shareholders’ Equity.

The cash flow statement represents the actual cash inflows/outflows in a given period. Under the indirect approach, the starting line item is net income, which will be adjusted for non-cash items such as D&A and changes in working capital to arrive at cash from operations. Cash from investing and financing activities are then added to cash from operations to arrive at the net change in cash.

For example, when a company depreciates a machine, it's an expense on the Income Statement, reducing PP&E on the Balance Sheet, but is added back on the Cash Flow Statement since it's non-cash.

Common Mistakes

There aren’t many common mistakes here aside from flat out not knowing what you’re talking about. This is a layup if you put the time into studying.

Key Takeaways / TLDR

• Understand Each Statement's Role: Income Statement (profitability), Balance Sheet (snapshot), and Cash Flow Statement (cash movement).

• Highlight Interconnections: Show how these financial statements relate and inform each other.

• Don’t Forget The Big Picture: The three financial statements work together to give a complete picture of a company's financial health.

TODAY’S QUESTION
What do the phrases “above the line” and “below the line” mean?

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THAT’S A WRAP
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