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A question about a period's earning, one date's position or the cash's movement, sent to the one statement built to answer it, and the ties that carry figures from one statement to another.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will take a question an owner actually asks, find the kind of time inside it — a period, a date or a movement of cash — and choose the statement and the line built to answer it, rather than the layout that happens to be familiar. You will also carry the owner's interest and the cash from one statement to the next.
You can build all three statements. This lesson turns them round: start with the question an owner is actually asking, and choose the statement built to answer it. It then ties the three together, because each ends where another begins, and knowing the ties is what lets an owner check one statement against the others. Nothing new has to be calculated; the skill is in reading a question for the kind of time inside it, and in knowing which line on which page holds the answer.
| Term | What it means |
|---|---|
| Period question | A question about what happened over a month or a year. |
| Date question | A question about one day. |
| Movement question | A question about why the cash in the account changed. |
| Tie | A figure one statement hands to another, such as closing cash or profit. |
| Owner's interest carried forward | Last period's owner's interest plus profit and money put in, less drawings. |
Every money question an owner asks carries a kind of time inside it, and the time chooses the statement.
| The question is about | Its time | The statement | Read it from |
|---|---|---|---|
| whether we earned more than it cost | a period | income statement | gross or operating profit |
| what we own, owe, or are left with | one date | balance sheet | the assets, liabilities or owner's interest |
| why the cash went up or down | a movement | cash-flow statement | its operating, investing or financing line |
Did we make money in March? is a period question: income statement. What do we owe the bank today? is a date question: balance sheet. Why is there less in the account than in January? is a movement question: cash-flow statement.
The three are tied together, which is why each can stay narrow. The cash-flow statement's closing figure is the cash on the balance sheet. The period's profit, less what the owner draws, is how much the owner's interest on the balance sheet grows:
$$\text{owner's interest at the end} = \text{at the start} + \text{profit} + \text{money put in} - \text{drawings}$$
Each statement answers its own question and leaves the others to the other two.
Another way: steps
Another way: table
Corner Bean's March, tied together, in dollars.
| Figure | Statement | Ties to |
|---|---|---|
| Operating profit 1,800 | income statement | owner's interest, with drawings |
| Drawings 1,500 | cash-flow statement (financing) | owner's interest |
| Owner's interest 5,200 → 5,500 | balance sheet | 5,200 + 1,800 − 1,500 |
| Closing cash 800 | cash-flow statement | the balance sheet's cash |
The café earned 1,800 and its cash fell by 2,600. Both are true, on different statements, and the ties show exactly how.
Underline the time in the question. In March, this year, over the summer: a period. Today, on 30 June, at the year end: a date. Why has, where did, what happened to the cash: a movement.
Underline the subject. Earning, owning and owing, or cash. Most questions have both a time and a subject, and they agree: a period question about earning, a date question about owing. When they seem to disagree — how much cash did the trading bring in this month? is a period question about cash — the subject decides: cash questions go to the cash-flow statement.
Go to the line, not the page. Each statement has several lines, and the question names one of them: gross profit or operating profit, payables or the loan, operating or investing cash flow.
Say the answer with its source. Operating profit on the March income statement: 1,800. An answer that names where it came from can be checked.
Check the choice by asking whether the other two statements could have answered. If they could not, the choice is right. Then check the ties: the closing cash on the cash-flow statement must equal the balance sheet's cash, and the owner's interest must have moved by the profit less the drawings.
Reaching for the familiar layout. An owner who reads the bank statement every morning asks it every question, including are we profitable? — which it cannot answer, because it leaves out every sale not yet paid for and every bill not yet due.
Reaching for the biggest number. Revenue is the largest figure on the income statement and answers only how much did people buy? Total assets is the largest on the balance sheet and includes everything the bank lent. A question is answered by the line built for it, not by the most impressive line in view.
Some of the questions owners care most about need more than one statement, read together.
Can I afford to pay myself more? needs the income statement, to see whether the profit supports it, and the cash-flow statement, to see whether the cash does — a business can be profitable and still have no cash to spare after buying equipment and repaying loans.
Can we take on this loan? needs the cash-flow statement, for the operating cash the repayments will come from, and the balance sheet, for what is already owed.
Why did we make a profit and end up with less cash? needs all three: the profit from the income statement, the movements from the cash-flow statement, and the growth in stock and unpaid invoices from the balance sheet.
The method is the same: split the question into its parts, send each part to its statement, and put the answers side by side.
An owner does not need to read every line of every statement every month. Three questions, asked in the same order each time, cover what matters, and each sends the owner to one line.
Did the month earn more than it cost? The income statement's operating profit, and its two margins beside last month's. If the gross margin has moved, look at prices and at what the goods cost; if only the operating margin has, look at the overheads.
Where did the cash go? The cash-flow statement's three sections. The operating line should be positive in an ordinary month; a negative operating line held up by financing is the pattern to catch early. Then the investing line: was anything bought that was not planned?
Where do we stand today? The balance sheet's current lines: cash, what customers owe, stock, and what is owed to suppliers and the bank in the coming months. The current and acid-test ratios, and the average days customers take to pay, compared with last month.
Then check the two ties: the closing cash on the cash-flow statement equals the balance sheet's cash, and the owner's interest has moved by the profit less the drawings. When both ties hold, the three statements are telling one consistent story, and the owner can trust each of them to answer its own question.
Written down as a single page — three figures, two ties, a line on anything that moved — the routine takes a quarter of an hour, and it is the page that makes the next conversation with a bank, a supplier or a partner a short one.
A landscaping business's owner meets her accountant every quarter with a list of questions. This quarter she brings five.
Did the spring contracts make money? A period question about earning: the accountant opens the income statement for the quarter and points to the operating profit of 14,200.
How much do we still owe on the mower loan? A date question: the balance sheet on 30 June shows 9,600.
Why is there less in the account than in March, after our best quarter? A movement question: the cash-flow statement shows operating cash flow of 8,900 — lower than the profit because two town governments owe 6,100 — then 7,500 on a trailer (investing) and 4,500 of drawings and 1,800 of loan repayment (financing). The change in cash is 8,900 − 7,500 − 6,300 = −4,900.
Is the business worth more than at the start of the year? The balance sheet's owner's interest has moved from 31,000 to 31,000 + 14,200 − 4,500 = 40,700, and the accountant checks that figure against the sheet.
Can I take on a second crew? That needs two statements: the income statement to see whether the work would be profitable, and the cash-flow statement, because a second crew's wages are paid weekly while the towns pay in forty-five days. The accountant builds a small forecast for it, which is the subject of a later lesson.
Five questions, three statements, and one that needed more than a statement at all.
Published company accounts contain the same three statements, with notes that show the ties: a reconciliation from the year's profit to the cash from operations, and a statement of changes in equity that carries the owners' interest from one balance sheet to the next. Reading those two notes is often the quickest way to understand how a company's profit and its cash came to differ.
One statement answers everything. Each answers one kind of question. The income statement cannot say what is in the bank; the balance sheet cannot say what the month earned.
The bank balance is a fourth statement. It is one number on one date, with no reasons attached. It feeds the other statements and answers none of their questions by itself.
Profit and the change in cash are the same figure. They can even have opposite signs in the same month.
The owner's interest grows by the profit. It grows by the profit less the drawings, plus anything the owner puts in.
A question with two parts has one answer. Can I pay myself more? needs the profit and the cash, and the two can give different answers; report both, each with the statement it came from, so that whoever reads the answer can see which part is settled and which is not.
Read the first question: was June worth trading?
$\text{a period, about earning}$
The time and the subject agree.
Send it to its statement and line.
$\text{income statement: operating profit } 1700$
June earned 1,700 more than it cost.
Read the second: can I pay everything I owe out of what I own?
$\text{one date} \to \text{balance sheet}$
Assets against liabilities on 30 June.
Read the third: why only 300 in the account after a good June?
$\text{a movement} \to \text{cash-flow statement}$
The reasons the cash moved.
Find the line that answers it.
$\text{investing: the pump, } -1500$
The trading was strong; the pump took the cash.
Read the profit off the income statement.
$1800$
March's earning.
Read the drawings off the cash-flow statement.
$1500$
In the financing section.
Carry the owner's interest forward from 5,200.
$5200 + 1800 - 1500 = 5500$
The balance sheet on 31 March should show this.
Read the cash-flow statement's change in cash.
$800 - 3400 = -2600$
The account fell.
Check the closing cash against the balance sheet.
$800 = 800$
The tie holds.
Explain the gap between profit and cash.
$1800 \text{ earned}, \ -2600 \text{ in cash}$
The espresso machine, the drawings and a loan repayment took more than the trading brought in.
Split the question into its parts.
$\text{does the profit allow it? does the cash?}$
One part for each of two statements.
Read the year's profit off the income statement.
$18000$
The first part.
Compare with his drawings of 14,400.
$18000 - 14400 = 3600$
The profit leaves room for 3,600 more a year.
Read the year's operating cash flow off the cash-flow statement.
$15000$
The second part.
Take off the equipment and loan repayments.
$15000 - 2000 - 4200 = 8800$
Cash free after the business's own needs.
Compare with the drawings.
$8800 - 14400 = -5600$
The cash does not support even today's drawings.
Put the two answers side by side.
$\text{profit: yes; cash: no}$
He keeps drawings where they are until the loan is repaid, and asks why the cash lags the profit.
Find the kind of time in the question.
$\text{a period, about earning}$
May, and covering costs.
Choose the statement.
$\text{the income statement}$
Built for period questions about earning.
Choose the line.
Six questions Dan asks about Fixit Mobile at the end of October. Match each to the statement that can answer it.
| The income statement | The balance sheet | The cash-flow statement | |
|---|---|---|---|
| Were October's sales enough to cover October's wages and rent? | |||
| How much is still owed on the van loan on 31 October? | |||
| Where did the $2180$ dollars of new loan go in October? | |||
| What was the gross margin on repairs last quarter? | |||
| Is the stock in the drawer today worth more than the unpaid supplier bills? | |||
| How much cash did buying the soldering station take in October? |
Complete the worked solution: on 1 May a shop's owner's interest was $5300$ dollars and its cash $2800$. In May it made an operating profit of $2100$; its operating cash flow was $1400$, it spent $200$ on equipment, and the owner drew $1500$. Carry the figures through to 31 May.
Read the profit off the income statement.
$\text{operating profit } 2100$
The period's earning.
Carry the owner's interest forward.
$5300 + 2100 - 1500 =$ e
Profit raises it; drawings lower it.
Add the three sections of the cash-flow statement.
$1400 - 200 - 1500 =$ n
Operating, investing and financing.
Find the closing cash for the balance sheet.
$2800 + (\text{change}) =$ k
The cash-flow statement ends where the balance sheet's cash begins.
Compare the profit with the change in cash.
$2100 - (\text{change}) =$ g
Two different questions, two different figures.
For March, the statements of Corner Bean show: revenue $12000$ dollars and operating profit $1800$ on the income statement; owed to suppliers $1300$ and owner's interest $5200$ on the balance sheet; opening cash $3400$, operating cash flow $1800$ and closing cash $800$ on the cash-flow statement. By how many dollars did the cash in the account change over the month?
Answer:
Five sentences from Alexa's notes on Corner Bean's statements. Mark every sentence that reads a figure off a statement that cannot give it.
This task has no paper form; do it on a device.
Six figures for Long Row Gardens in May, in dollars: revenue $4400$; operating profit $1300$; owed to suppliers $700$; owner's interest $4600$; operating cash flow $800$; closing cash $1100$. How much cash did the trading bring in this month?
Answer:
A joinery's balance sheet on 31 December last year showed an owner's interest of $4200$ dollars. This year its income statement shows a profit of $2200$; the owner put $0$ of her own money in, and the cash-flow statement shows drawings of $2100$. What owner's interest should this year's balance sheet show on 31 December?
Answer:
A bicycle shop's bookkeeper has four questions from the owner. For each, choose the statement that can answer it.
| Statement | |
|---|---|
| Did the workshop's prices cover the parts over the summer? | |
| What does the business owe the bank on 30 September? | |
| Why is the account $6000$ dollars lower than in June after a busy summer? | |
| Could the shop pay everything it owes out of what it owns, on 31 December? |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
A florist's balance sheet on 30 June shows an owner's interest of $5000$ dollars. Her income statement for the half-year to 30 June shows a profit of $1700$, and the cash-flow statement shows drawings of $2200$; she put no money in. What was the owner's interest on 1 January?
Answer:
You can send a business question to the statement that answers it, read the right figure from a set of all three, and check the ties between them. Tell someone why the bank balance cannot say whether a month was profitable. Next: the cash book the statements are built from, and the check that keeps it true.
15. Your turn: Did we sell enough in May to cover May's costs?, step 3
$\text{operating profit}$
Sales against every cost of trading.