Three Financial Statements: How They Link in Duolingo's 10-K

The three financial statements are one balance sheet at two dates and the statements that explain the difference. Those are the income statement, the cash flow statement and a fourth that the SEC counts but its own beginners’ guide passes over, the statement of stockholders’ equity. Read the balance sheet first, then check that each explanation lands on it.

Duolingo’s 2025 annual report shows why the order matters. Between 2024 and 2025 its net income rose 4.7 times and operating cash flow 36% (our arithmetic). The flow statements record that gap. The balance sheet shows what it left behind in a single line, deferred tax assets, which went from $0.7M to $227.3M (Duolingo, 2026).

Four statements on two clocks, and where each one lands on the balance sheet

Statement	Clock	What it answers	Where it lands	Duolingo, 2025	Rule for SEC filers
Balance sheet	A date (two year-ends in a 10-K)	What the company owns and owes, and the owners’ residual	It is the landing	Total assets $1,992.2M; equity $1,347.0M	Regulation S-X, Rule 3-01
Income statement	A period (three years in a 10-K)	Revenue earned less expenses incurred, on the accrual basis	Retained earnings, through the equity statement	Net income $414.1M	Rule 3-02
Cash flow statement	A period (three years)	Cash received and paid: operating, investing, financing	Cash, cash equivalents and restricted cash	Up $250.6M, to $1,039.1M	Rule 3-02; ASC 230; IAS 7
Statement of stockholders’ equity	A period (three years)	How each equity caption changed	Every equity caption, including paid-in capital	Equity up $522.5M	Rule 3-04

Source: SEC, Beginners’ Guide to Financial Statements (2007); Regulation S-X, Rules 3-01, 3-02 and 3-04; Duolingo, Inc., Form 10-K for 2025. Figures rounded from $ thousands; the equity change is our arithmetic.

What are the three financial statements?

The balance sheet, the income statement and the cash flow statement, plus a fourth that regulators count, the statement of stockholders’ equity. The SEC’s 2007 guide for beginners opens its tour with a count: “There are four main financial statements”. The fourth is the statement of shareholders’ equity. The guide then announces, “Let’s look at each of the first three financial statements in more detail”. It never returns to the fourth (SEC, 2007).

The four statements run on two clocks. The balance sheet describes one date, and in the SEC’s words it “does not show the flows into and out of the accounts during the period”; the other three each cover a period and explain part of the change between two balance sheets. The cash flow statement explains the change in cash, while the equity statement explains the change in every equity caption, and net income, the income statement’s last line, is one of its entries.

A founder who reads only the income statement is reading one explanation without the position it explains.

Why does a 10-K show two balance sheets but three years of flows?

Because the statements arrived at different times, and the SEC’s rules still reflect it. The Securities Act of 1933 listed what a registration statement had to contain. Item 25 of its Schedule A asked for “a balance sheet as of a date not more than ninety days prior to the date of the filing of the registration statement”. The balance sheet had to include the issuer’s surplus, “showing how and from what sources such surplus was created”. Item 26 asked for a profit and loss statement for the latest fiscal year and the two before it (Securities Act of 1933, Schedule A). An analysis of equity was in the statute from the start. A cash flow statement was not.

It came 54 years later. FAS 95, the FASB’s standard issued in November 1987, replaced a statement of changes in financial position for which APB Opinion 19 had “permitted but did not require” cash flow information. The new statement applied to fiscal years ending after 15 July 1988 (FASB, 1987), and its rules now sit in ASC 230.

Regulation S-X keeps the asymmetry. A 10-K carries audited balance sheets for the 2 most recent year-ends (Rule 3-01) and income and cash flow statements for 3 years (Rule 3-02). An emerging growth company may present 2 years in its IPO registration statement (15 U.S.C. 77g). Rule 3-04 adds a reconciliation of each equity caption for every period with an income statement (Rule 3-04). The result is that only the latest year sits between two balance sheets.

For the two earlier years a reader can trace only cash and equity, because those two statements print their own opening balances. Duolingo’s 10-K opens 2023 with $608.2M of cash and restricted cash and $542.1M of equity, and with no other line from that date.

How do the three financial statements link?

Each flow that claims to explain a balance-sheet line should equal the change in that line, and any difference should have a disclosed reason. Duolingo’s 2025 statements pass on the lines that matter most.

Duolingo’s 2025 flows land on its balance sheet, $ thousands

Flow, and the statement that reports it	Amount	Balance-sheet line, 31 Dec 2024 to 31 Dec 2025	Change in the line	Lands?
Net income (income statement, then equity statement)	414,065	Retained earnings: (125,847) to 288,218	414,065	Yes
Stock-based compensation 137,437, option exercises 12,570, withholding taxes on net settlement (41,617) (equity statement)	108,390	Additional paid-in capital: 950,393 to 1,058,783	108,390	Yes
Deferred revenue (operating cash flow)	123,321	Deferred revenues: 372,884 to 496,205	123,321	Yes
Accounts receivable (operating cash flow)	(33,904)	Accounts receivable: 128,923 to 162,827	33,904	Yes, sign reversed
Net increase in cash (cash flow statement)	250,598	Cash and cash equivalents: 785,791 to 1,036,389; restricted cash 2,735 in both years	250,598	Yes, ending at 1,039,124
Deferred income taxes (operating cash flow)	(225,185)	Deferred tax assets, net: 675 to 227,339	226,664	Within 1,479

Source: Duolingo, Inc., Form 10-K for the year ended 31 December 2025. Changes and sums are our arithmetic. The 10-K does not explain the deferred-tax residual line by line.

Two rows correct what two training firms teach. Wall Street Prep, a financial-modelling training firm, says “the ending cash balance at the bottom of the cash flow statement flows to the balance sheet as the cash balance for the current period”. CFI says it “must equal the cash account in the balance sheet”. Duolingo’s cash flow statement ends at $1,039.1M, while its balance sheet’s cash line reads $1,036.4M; the $2.7M difference is restricted cash, reported further down among non-current assets.

US GAAP has required the statement to include restricted cash since ASU 2016-18, effective for public companies in fiscal years beginning after 15 December 2017 (FASB, 2016).

The second correction concerns retained earnings, which Wall Street Prep calls “the centerpiece that links the three financial statements together” (Wall Street Prep). At Duolingo, paid-in capital moved by $108.4M in 2025 through three flows that never touch retained earnings. In a startup that has yet to make a profit, retained earnings only accumulate losses, so flows of that kind are usually most of what happens to equity. The month-end close checklist and P&L review template below have room for each of these landing checks.

Why can net income and operating cash flow tell different stories?

Because some income is an estimate that brings in no cash. Duolingo’s 2025 income statement shows $182.4M of income before taxes and a tax line that adds $231.7M, for net income of $414.1M; the company paid $14.4M of income taxes in cash. The tax line rests on a judgement. In 2025 Duolingo “released the valuation allowance previously recorded against its federal and state deferred tax assets, resulting in a one-time income-tax benefit of $256.7 million”. Its tax note says the release and the year’s other discrete tax items are “not indicative of ongoing operating performance” (Duolingo, 2026).

Each statement records the release in its own way. The income statement counts it as profit, although no cash moved. The cash flow statement subtracts $225.2M of deferred income taxes, which is why operating cash flow ($387.8M) fell below net income for the first time in the three years shown. The balance sheet holds the asset, $227.3M, which is worth something only if Duolingo earns enough taxable income to use it. The 10-K warns that if results decline, “we may be required to record a valuation allowance against some or all of our deferred tax assets”.

Excluding the one-time $256.7M benefit, net income would have been $157.3M, a rise of 78% instead of 367%. As the deductions behind the asset are used, the asset shrinks through tax expense, so later income statements will carry the reverse. An investor who priced Duolingo on 2025 earnings growth paid for an entry that brought in no cash, and a startup carrying tax losses behind a valuation allowance may meet the same entry once its profits look durable.

Why does a funded startup show a stockholders’ deficit?

Usually because its preferred stock sits outside equity, and the largest equity flows never pass through the income statement. At the end of 2020, as its 2021 IPO prospectus shows, Duolingo held $120.5M of cash against $73.8M of total liabilities, yet its balance sheet showed a stockholders’ deficit of $80.7M. The $182.6M of convertible preferred stock its investors held sat between liabilities and equity. The prospectus explains that it was “classified as outside of stockholders’ deficit as the preferred stock has redemption features that are outside of the Company’s control upon certain triggering events”, such as a deemed liquidation (Duolingo, 2021).

Regulation S-X keeps such stock out of the stockholders’ equity heading (Rule 5-02), so the prospectus titles its fourth statement “Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit”. A private company escapes S-X until it files for an IPO. Then the rule applies.

In 2020 a net loss of $15.8M turned into $17.7M of operating cash flow. Two items did most of the work: $17.0M of stock-based compensation, an expense paid in shares, was added back, and deferred revenue rose $28.5M as subscribers paid in advance. Financing brought in $44.9M from preferred stock that the balance sheet’s equity section does not show at all.

Five years later the same statement records a cash cost that the add-back hides. In 2025 Duolingo added back $137.4M of stock-based compensation in operating cash flow and paid $41.6M of employees’ withholding taxes on net-settled awards, 30% of the expense (our arithmetic). The payment appears in financing activities and as a reduction of paid-in capital. Duolingo defines free cash flow as operating cash flow “less capitalized software development costs and purchases of property and equipment”. On that definition it was $360.4M, and it excludes a payment equal to 11.5% of the total. A board that reads stock compensation only as a non-cash add-back misses the cash a company that settles awards net, as Duolingo does, spends on it every year.

Is operating cash flow comparable between US GAAP and IFRS companies?

Not without adjustment, because even cash, the one line a bank can confirm, is sorted by convention. FAS 95 put interest paid in operating activities in 1987. Three of the seven board members dissented. They argued that “interest paid is a cost of obtaining financial resources that should be classified as a cash outflow for financing activities”, and that interest received belonged in investing (FASB, 1987). They lost. IAS 7 left the choice open: interest paid and received may be operating, or financing and investing respectively (IAS 7).

From 1 January 2027, IFRS 18 removes the options for many companies. For those whose main business is neither lending nor investing, interest paid becomes financing and interest received investing (KPMG, 2026). The dissent becomes the international rule for most companies 40 years after it was written.

The difference is material for a company with cash to invest. Duolingo reported $45.2M of interest income in 2025, equal to 11.7% of its operating cash flow (our arithmetic). Under US GAAP the interest it receives counts as operating; the same receipts under IFRS 18 would sit in investing. Interest income is an accrual figure, so the cash amount differs somewhat, but the order of magnitude holds.

Some transactions leave the statement altogether. FAS 95 and IAS 7 both require investing and financing transactions that use no cash to be disclosed elsewhere. In 2025 Duolingo obtained $39.2M of right-of-use assets in exchange for new lease liabilities, and both appear on its balance sheet, while the cash flow statement shows neither and a supplemental schedule carries the figure. A company that leases and one that buys therefore show different cash flows for the same assets.

Which statement measures performance?

The income statement, say the standard-setters; operating cash flow, say many analysts. FAS 95 bans cash flow per share and states that “Neither cash flow nor any component of it is an alternative to net income as an indicator of an enterprise’s performance” (FASB, 1987). The other camp, in Schwab’s version, notes that “analysts often look to cash flow from operations as the most important measure of performance” (Schwab, 2025).

Both camps are correct that a balance sheet measures no performance. It records a position, and it is the statement most built on estimates: Duolingo’s $227.3M deferred tax asset rests on forecasts of taxable income.

As advice on what to read first, their view fares worse: Duolingo’s 2025 accounts would have misled both camps. The earnings reader sees profit up 4.7 times, about three-quarters of the increase coming from the tax line. The cash reader sees operating cash flow without the $41.6M of stock-related taxes in financing. Both misreadings sit on the balance sheet, in lines that changed, and starting there turns the flow statements into answers to specific questions. The SEC’s guide ends on the same point: “No one financial statement tells the complete story.”

Read this way, the three financial statements are a balance sheet at two dates with explanations attached, and in Duolingo’s case one line, up from $0.7M to $227.3M, explains why profit and cash parted.

References

• Charles Schwab (2025). 3 Financial Statements to Measure a Company’s Strength.
• Corporate Finance Institute. The Three Financial Statements.
• Duolingo, Inc. (2021). Prospectus (Form 424B4), filed 28 July 2021.
• Duolingo, Inc. (2026). Form 10-K for the fiscal year ended 31 December 2025.
• FASB (1987). Statement of Financial Accounting Standards No. 95: Statement of Cash Flows (now ASC 230).
• FASB (2016). Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.
• IAS 7, Statement of Cash Flows, as endorsed by Commission Regulation (EU) 2023/1803.
• KPMG (2026). IFRS 18 changes the statement of cash flows. IFRS Institute, 1 June 2026.
• SEC Office of Investor Education and Advocacy (2007). Beginners’ Guide to Financial Statements.
• SEC. Regulation S-X, Rules 3-01, 3-02, 3-04 and 5-02 (17 CFR 210).
• Securities Act of 1933, Schedule A (15 U.S.C. 77aa) and section 7(a)(2) (15 U.S.C. 77g).
• Wall Street Prep. How Are the Financial Statements Linked?

Duolingo’s figures come from its 2021 prospectus and its 10-K for 2025, rounded from $ thousands where shown in millions. Percentages, year counts and differences printed without a source are derived from Duolingo’s reported figures and the dates of the cited standards, and the piece uses no hypothetical company.