Chapter 2 · Day 2 — The three statements and how they link
How the three statements lock together
Profit flows into equity, cash flow explains the cash line, and the balance sheet has to balance. Miss the links and the numbers can lie to you.
2 of 30 · 13 min
The three statements are not three reports. They are three views of the same twelve months, and each one is a check on the other two.
| Statement | Question it answers | Period |
|---|---|---|
| Income statement | Did it make a profit? | Over the year |
| Balance sheet | What does it own and owe? | At one instant |
| Cash flow | Where did the cash go? | Over the year |
What a balance sheet balances
The three links that must hold
- 1Net profit from the income statement, minus dividends paid, increases retained earnings inside equity on the balance sheet.
- 2The closing cash on the cash flow statement is the cash line on the balance sheet.
- 3Depreciation is an expense on the income statement, reduces the asset on the balance sheet, and is added back on the cash flow because no cash left.
Worked: one transaction through all three
A company sells goods for Rs 10,00,000 on credit that cost it Rs 6,00,000.
| Statement | Effect |
|---|---|
| Income statement | Revenue +10,00,000; COGS −6,00,000; profit +4,00,000 |
| Balance sheet | Receivables +10,00,000; inventory −6,00,000; equity +4,00,000 |
| Cash flow | **Nothing.** No cash has moved yet. |
Where the cash went
Reading order that works
- 1Cash flow first — is the profit real?
- 2Balance sheet second — is it financed safely?
- 3Income statement third — is it growing, and at what margin?
Most readers do this in reverse and anchor on the profit number. Starting with cash makes the other two harder to misread.
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