How the Three Financial Statements Connect

Each statement answers a question the other two cannot. The income statement asks whether the business earned a profit over the year. The balance sheet asks what the company owns, owes and is worth on the last day. The cash flow statement asks how much cash actually came in and went out.

A kirana owner already keeps all three in his head. The notebook of the day's sales and expenses is the income statement. The stock, the udhaar he is owed and the loan he owes make up his balance sheet. The cash in the drawer, counted every night, is his cash flow. When they disagree he knows something is wrong: a good sales month with an empty drawer means customers have not paid yet.

The three statements exist because profit, position and cash can each look healthy while another looks weak. Reading all three together is what lets you see that.

Bharat Cables Ltd is an illustrative wire and cable maker. It is not a real company, and no real listed business is described by these numbers. All figures are in ₹ crore for the year to 31 March 2025 (FY25). The income statement and balance sheet are explained line by line in the topics on reading the income statement and reading the balance sheet. Here is everything you need in one place.

Each line ties to the one above it. Revenue of 1,200 less cost of goods of 780 leaves 420. Less running costs of 276 leaves EBITDA of 144. Less depreciation of 44 leaves EBIT of 100. Less finance cost of 34, plus other income of 18, less a one-off charge of 4 leaves profit before tax of 80. Tax of 20 leaves profit after tax of 60.

There are four meeting points. Learn these and the rest of the three statements stops looking like separate documents. Each one is a number that is written in one statement and reappears, on purpose, in another.

Profit before tax is ₹80 crore. Operating cash flow is ₹64 crore. Here is the path between them, line by line. Under Ind AS 7 a company can present operating cash flow by the direct method or the indirect method. Almost every Indian annual report uses the indirect method shown here, which starts from profit and corrects it.

The first group of lines removes items that reduced profit but did not use cash, or that belong in another section. Depreciation of 44 is added back. Finance cost of 34 is added back too, because interest paid is shown under financing. Other income of 18 is removed, because interest received is shown under investing. The 4 crore provision is added back, because it was an accounting entry and no cash left. The result is 144, which is the same as EBITDA, as it should be.

The second group is working capital, the money tied up in running the business. Stock rose by 40, so cash was spent. Customers owe more by a gross 54, so sales were made but not collected. Suppliers are owed 34 more, which is cash the company has not yet paid out. The net effect is minus 60. Tax paid of 20 then leaves operating cash flow of 64.

This is the line that confuses beginners most, and it is the cleanest example of how the statements agree. Depreciation is an accounting way of spreading the cost of a machine over its useful life. Bharat Cables did not pay ₹44 crore to anyone this year. The cash went out in earlier years when the plant was bought.

So the same figure of ₹44 crore does three things at once. In the income statement it reduces profit, since using up a machine is a real cost. In the cash flow statement it is added back, because no cash moved. In the balance sheet it reduces the book value of plant, since the machine is a year older. The number is the same each time because it is the same fact seen from three sides.

The balance sheet then shows the result in one line. Plant started at 480. The company bought 110 of new plant, which is the capex in the investing section. Depreciation of 44 was charged. 480 + 110 − 44 = 546.

Working capital is where the three statements disagree most, and it is worth slowing down here. In the income statement, a sale is profit the day the goods are delivered. On the balance sheet, an unpaid sale sits in receivables. In the cash flow statement, it counts as cash only when the customer pays.

So when receivables grow faster than sales, the income statement looks better than the cash flow statement. Bharat Cables' revenue grew 20 per cent, but receivables grew by a third, from 150 to 200. The balance sheet shows 50 more owed by customers, and the cash flow statement shows the same story as cash not yet received. The gross figure is 54, and the difference of 4 is the provision, which sits in the balance sheet as a reduction of the receivable.

Stock works the same way in the other direction. Buying more raw material uses cash today for goods that will earn later. Supplier credit works in reverse. Paying suppliers 34 crore later than the goods arrive means that much cash stays in the bank a little longer, which lifts operating cash flow without the business earning a rupee more.

The bull reading of all of this is a growing company that is building stock and extending credit to win customers. The bear reading is that some of these customers may pay late or not at all, and supplier credit cannot keep rising for ever. The statements show the amounts; the trend over several years tells you which reading is closer.

Add operating cash flow of 64 to investing cash flow of minus 92 and you get minus 28. That is before the company pays 34 of interest and 12 of dividend, which takes the shortfall to minus 74. In other words, the business needed ₹74 crore more than it produced. It raised ₹90 crore of new borrowings, which left it with a net increase of 16 in cash.

The balance sheet records the same thing from the other direction. Borrowings went from 300 to 390, an increase of 90. Cash went from 30 to 46, an increase of 16. Nothing is invented; the balance sheet is the running total of what the cash flow statement records.

This is a good place to see both sides of debt. The bull reading is that the company borrowed to build capacity that will earn for years, and it kept its dividend. The bear reading is that it depended on lenders for a second year of growth while interest cover stood at just 2.9 times (EBIT of 100 against finance cost of 34), so a weaker year would leave little room. The statements give you the facts; judging the risk needs the debt and leverage topic and several years of trend.

Equity on the balance sheet is a running total. Each year the company adds the profit it has kept and subtracts what it pays out to shareholders. What is kept is called retained earnings, and it is the main part of the reserves in other equity.

Bharat Cables started the year with equity of 400. It earned a profit after tax of 60 and paid a dividend of 12, which was ₹3 a share on 4 crore shares. The closing figure is 448. If the company had also bought back shares, that would have reduced equity further.

This link is why a company that loses money year after year sees its equity shrink, and why one that keeps most of its profit and earns well on it can grow its net worth without asking shareholders for a rupee.

Yes, and it is the best way to know that you have understood a company. A tie-out means checking that the numbers that should agree do agree. If one does not, you have either misread a line or found something the company needs to explain.

Do it in this order, with the cash flow statement in the middle, because it is the one that touches the other two.

Reading all three is far better than reading one, but the combined picture still has limits.

They are history. Every figure describes a year that has ended. They show how the company got here, not where it is going. A company can look sound in all three statements and still lose its main customer next month.

They rest on judgements. The life of a machine, the size of the provision, when a sale counts and whether a cost is capitalised are all estimates. Two honest companies can report different profit for the same business. The notes to accounts and the auditor's report are where you find out how aggressive those choices were.

They do not price the business. None of the three tells you what the shares are worth. That needs valuation, which the later topics in this module build on the numbers you have just tied out.

And a set of statements that all agree with each other can still be wrong together, if the underlying accounting was misleading. Agreement is a necessary test, not a proof of honesty.

You will not always need all three. The table gives a starting point for the common questions. It is a guide to where the answer usually sits, and the other statements should still be used to check it.