The three pictures of a business
Every set of accounts answers three questions: what was earned, what is owned and owed, and where the cash went. This lesson introduces the three statements, follows one new shop through all of them, and reads a real company's year in each.
- Level
- Beginner
- Reading time
- About 21 minutes
- Know this first
- Accrual vs cash accounting
By the end you will be able to:
- name the three main financial statements and the question each one answers
- tell a statement of a period from a statement of a single date
- see how one business event shows up in more than one statement
- find a company's profit, operating cash and total assets in its real accounts
What a set of accounts is for
In a year a business sells, buys, borrows, pays wages and settles bills thousands of times. No outsider can read thousands of records, and an owner who tried would still not see the shape of the year. Financial statements squeeze the year into a few pages, and each page answers one question. Learn the questions, and any company's accounts, from a street shop to a listed group, become readable.
Earlier lessons built the vocabulary: profit, assets, liabilities and equity, cash, and the timing rules that make profit differ from cash. This module puts those words into the three statements that carry them.
Three statements, three questions
A useful way to remember them: the balance sheet is a photograph, and the other two are films. A photograph shows everything at one instant. A film shows what happened between two instants, and the balance sheet is the photograph at each end.
| Statement | The question it answers | Covers | Lesson |
|---|---|---|---|
| Income statement, also called the statement of profit and loss | Did the business earn more than it spent? | A period | 8 |
| Balance sheet, which some Indian filings call the statement of assets and liabilities | What does it own, owe and keep? | One date | 9 |
| Cash flow statement | Where did cash come from, and where did it go? | A period | 10 |
Two more parts complete the set. The statement of changes in equity shows how the owners' stake moved during the year. The notes break the headline figures into detail and explain the accounting choices behind them. Ind AS 1, the standard that sets out how Indian companies present their statements, lists all of these as the parts of a complete set. This module concentrates on the three above, because they carry the numbers most readers need first.
One shop, three statements
Meena opens a new shop. These are the same eight events used in the lesson on the accounting equation. Slide through them and watch which statements each event changes. Some events change all three. Some change only one. A purchase on credit, event 4, changes only the balance sheet, because no cash has moved and nothing has yet been earned or used up.
Event 8 of 8. She pays ₹10,000 of shop rent. This changes the profit and loss account, the balance sheet and the cash flow statement.
Look at the final position, after event 8. The profit and loss account says Meena made ₹20,000. The cash flow statement says her cash rose by ₹3,80,000. Both are right, and neither contradicts the other. Most of the cash came from the loan and her own savings, which are financing and not profit. Her operating cash was actually negative, minus ₹20,000, even though she made a profit, because ₹90,000 of stock is still on the shelf and ₹50,000 is still owed to the supplier.
The balance sheet pulls it together. Its assets are ₹5,70,000, which are the cash of ₹3,80,000, stock of ₹90,000 and fittings of ₹1,00,000. Its liabilities are the ₹2,00,000 loan and the ₹50,000 owed to the supplier. Its equity is ₹3,20,000, which is Meena's ₹3,00,000 plus the ₹20,000 profit. The profit from one statement and the cash from another both turn up inside the third. The lesson on how the three statements connect works through these joins slowly.
Who reads them, and what they look for
Different readers ask the same statements different questions.
- An owner or investor asks whether the business earns enough on what has been put into it, and whether the profit turns into cash.
- A lender asks whether the business can pay interest and repay the loan. The cash flow statement and the borrowing shown on the balance sheet matter most.
- A supplier asks whether the bill will be paid on time. Cash, receivables and what is owed to other suppliers answer that.
- A tax authority works from profit, but adjusts it by tax rules, so the tax actually due differs from the tax expense shown in the accounts.
- An employee or a customer asks whether the business will still be around, which is mostly a question about cash and borrowing.
A real company: Titan
Here is one year of Titan Company, standalone, seen through all three statements. Each block takes one headline line from a statement. Nothing has been calculated except the revenue subtotal, which adds two printed lines.
| ₹ crore | FY2023-24 | FY2022-23 |
|---|---|---|
| Statement of profit and loss, for the year | ||
| Revenue from operations | 47,114 | 38,270 |
| Profit for the year | 3,544 | 3,333 |
| Cash flow statement, for the year | ||
| Net cash from operating activities | 2,030 | 1,810 |
| Net change in cash | 153 | 2 |
| Cash at the end of the year | 272 | 119 |
| Balance sheet, as at 31 March | ||
| Cash and cash equivalents | 272 | 119 |
| Total assets | 32,862 | 25,088 |
| Total equity | 14,457 | 11,994 |
A reader who looked only at the profit and loss account would say Titan earned ₹3,544 crore. A reader who looked only at the cash flow statement would say its operations produced ₹2,030 crore of cash. A reader who looked only at the balance sheet would say it ended the year with ₹32,862 crore of assets, funded by ₹14,457 crore of equity and the rest from liabilities. All three are correct and they are not rivals. Each is an answer to a different question, and the full picture needs all three.
Cash makes the point sharply. Titan's cash rose by ₹153 crore, from ₹119 crore to ₹272 crore. That is a small change against a profit of ₹3,544 crore, because the business spent heavily on inventory and investments and borrowed to do it. Without the cash flow statement that story would not be visible. This is an educational reading of published figures, not a view on Titan as an investment.
Three statements, three of the world's largest companies
Every company that reports publicly produces the same three statements: an income statement, a balance sheet and a cash flow statement. What changes is the size and the shape. The table gives one line from each statement for Apple, Microsoft and Toyota, in millions of each company's own currency. Revenue and net income come from the income statement, total assets and equity from the balance sheet, and cash from operations from the cash flow statement.
| Latest fiscal year, millions of each currency | Revenue | Net income | Total assets | Equity | Cash from operations |
|---|---|---|---|---|---|
| Apple | $416,161 | $112,010 | $359,241 | $73,733 | $111,482 |
| Microsoft | $281,724 | $101,832 | $619,003 | $343,479 | $136,162 |
| Toyota | ¥48,036,704 | ¥4,789,755 | ¥93,601,350 | ¥36,878,913 | ¥3,696,934 |
Apple earned $112.0 billion of net income, Microsoft $101.8 billion, and Toyota ¥4,789,755 million, which is a different number only because the currency is different. Microsoft's balance sheet of $619.0 billion is the largest of the dollar-reporting pair, against Apple's $359.2 billion, even though Apple's revenue is larger; Toyota's assets are ¥93.6 trillion. A company with large assets does not always have large revenue, and the relation between the two is the subject of the lessons on ratios later in the course.
Where to find the real statements
All of the statements used in this site are public and free, and you can read the originals yourself. The sources are listed at the end of the lesson. In practice, there are three places to look.
- United States. A company listed in the US files an annual report on Form 10-K, quarterly reports on Form 10-Q and results announcements on Form 8-K with the Securities and Exchange Commission. All are free on the SEC's EDGAR website. Apple's and Microsoft's statements here come from the results announcements, filed as Exhibit 99.1 to a Form 8-K.
- Foreign companies listed in the US. These file an annual report on Form 20-F and furnish other documents on Form 6-K. Toyota's financial summary used in this site was furnished to the SEC on Form 6-K.
- Everywhere else. Most stock exchanges publish the filings of the companies they list, and most large companies put their annual report on an investor relations page. Indian companies publish their annual reports and quarterly results on the websites of the stock exchanges.
When a company has an annual report, begin with the financial statements and then read the notes that follow them. The statements are summaries, and the notes explain how the figures were produced.
Audited, unaudited, and why it matters
An annual report contains statements that an independent auditor has examined and reported on. A results announcement released before the annual report usually contains the same statements before the audit is complete. Toyota's financial summary says so on its face: the figures are unaudited, and they are presented in whole millions of yen, which is why a few of its totals differ from the sum of the lines by a million or two because of rounding. The Apple and Microsoft statements in the lessons come from announcements too, and the annual reports that follow are the audited versions.
The audit does not guarantee that a company is a good investment, or that every estimate in the accounts is right. It gives assurance that the statements follow the accounting standards in all material respects. A statement without an audit should be read with a little more care, and any serious analysis goes back to the audited annual report.
One more difference to keep in mind is naming. US companies call the three statements the income statement or statement of operations, the balance sheet and the statement of cash flows. Companies reporting under IFRS often call the balance sheet the "statement of financial position" and the income statement the "statement of profit or loss". The contents are the same, and the next lessons use the plain names throughout.
Common mistakes
Reading one statement on its own
Each statement hides something the others reveal. A profitable business can run short of cash. A business with a large cash inflow can be piling up debts that fall due next year. Reading all three is the minimum.
Treating the balance sheet as a record of the year
It is a photograph of one date. To know what happened during the year, compare the balance sheets at the start and the end, and read the two films in between.
Expecting profit to equal the change in cash
They would match only if every sale were paid at once, every cost paid at once, and nothing was bought to keep. The lesson on cash vs profit shows how far apart they can drift.
Assuming an audited statement means a healthy business
An audit is an independent check that the statements follow the reporting rules and are free of material errors. It is not a judgement on whether the business is doing well.
Try it yourself
1. Which statement would you open to answer each question? (a) How much cash did the company have on 31 March? (b) Did it make a profit during the year? (c) Why did cash rise although profit fell?
Show the answers
(a) The balance sheet, which shows cash on that date. The cash flow statement also shows it as closing cash. (b) The profit and loss account. (c) The cash flow statement, which shows what moved cash apart from profit, such as borrowing, selling assets or collecting from customers.
2. Meena buys ₹20,000 of stock on credit. Which statements change?
Show the working
Only the balance sheet. Stock rises by ₹20,000 and so does what she owes the supplier. No cash moved, so the cash flow statement is unchanged. Nothing has been earned or used up, so the profit and loss account is unchanged.
3. A statement says "for the year ended 31 March 2024". Another says "as at 31 March 2024". What is the difference?
Show the answer
"For the year ended" covers a period, the whole year, which is true of the profit and loss account and the cash flow statement. "As at" is a single date, which is the balance sheet.
4. Using Titan's figures: cash was ₹119 crore at the start of the year and ₹272 crore at the end. What was the change, and which statement shows both ends together?
Show the working
₹272 crore − ₹119 crore = ₹153 crore. The cash flow statement shows the opening cash, the change and the closing cash together. The balance sheet shows one date at a time, so you would need the previous year's balance sheet for the opening figure.
Where this is used
Everything in finance that is not about a price starts from these statements.
- A bank asks for them before it lends, usually for three years, to see the trend.
- An analyst reads them before comparing two companies, because ratios in later lessons are built from lines in these statements.
- A business owner uses them to answer simple questions: can we afford to hire, are we building up debt, did that new product pay for itself?
- A student uses them as the map for the rest of the subject. Valuation, budgeting and credit all begin here.
Key terms
- Financial statements
- The formal reports that show how a business performed and where it stands.
- Income statement
- The statement of profit and loss. Revenue less expenses over a period.
- Balance sheet
- Assets, liabilities and equity on one date.
- Cash flow statement
- Cash received and paid over a period, grouped into operating, investing and financing.
- Statement of changes in equity
- A reconciliation of the owners' stake from the start of the year to the end.
- Notes
- The pages that explain and break down the figures in the statements.
- Audit
- An independent examination that the statements follow the reporting rules and are free of material error.
- Standalone and consolidated
- Standalone covers the company alone. Consolidated adds its subsidiaries as if they were one business.
Questions people ask
Are "income statement" and "statement of profit and loss" the same thing?
Yes. Indian company filings use "statement of profit and loss". International usage often says "income statement". This site uses both and means the same thing.
How often are statements published?
Companies prepare them for every financial year. Listed companies in India also publish results every quarter. Those quarterly results centre on the profit and loss account. A balance sheet comes with the half-yearly and annual results, and the full set of statements with the notes comes with the annual accounts.
Do small businesses prepare the same statements?
The logic is the same, from a shop to a listed company. A small business may keep simpler books and need fewer lines, but the questions each statement answers do not change.
Why is there a fourth statement, on equity?
Because equity can change for reasons that never pass through the profit and loss account, such as new shares being issued or a dividend being paid. The statement of changes in equity lists them. The lesson on how the three statements connect uses it to connect profit to the balance sheet.
Sources and review
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of the profit and loss account and balance sheet figures.
- Titan Company Limited, audited results with statements of cash flows for the year ended 31 March 2024, filed with BSE. Source of the cash flow figures.
- Institute of Chartered Accountants of India, Ind AS 1, Presentation of Financial Statements (lecture slides), for what makes up a complete set of financial statements.
- IFRS Foundation, Conceptual Framework for Financial Reporting, for the purpose of financial statements.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
How the numbers were checked: every Titan figure comes from a printed line. Revenue from operations adds two printed lines. Closing cash in the cash flow statement was checked against cash on the balance sheet, and both were ₹272 crore. Meena's eight events were calculated and the three statements checked against one another after each event.