Chapter 1 of 8
Read the three statements as one business story
Understand the balance sheet, profit and loss account, cash flow and equity changes using a small Indian manufacturing business.
In this chapter
The balance sheet is a position at a date #
Assets describe resources; liabilities describe obligations; equity is the residual accounting interest. The identity assets = liabilities + equity must hold. It does not mean every asset can be sold at its book number or every liability is payable tomorrow.
Use a fictional machine-parts manufacturer. Its factory, inventory, customers owing money and bank cash are different assets with different liquidity. A business can own valuable equipment and still lack cash for salaries.
| Statement | Time view | First question |
|---|---|---|
| Balance sheet | At a date | What is owned, owed and left for owners? |
| Profit and loss | Over a period | What was earned and recognised as expense? |
| Cash flow | Over a period | Where did actual cash come from and go? |
The P&L records activity over a period #
Revenue and expenses determine accounting profit for a quarter or year. Recognition timing can differ from cash receipt or payment. Depreciation allocates certain asset costs; it is not the same as current capex.
Read revenue, operating expenses, depreciation, finance cost and tax separately. Other income can make total profit grow while operating performance weakens. Compare like periods and check whether a result is cumulative or a single quarter.
Cash flow explains where money moved #
Operating, investing and financing cash flows answer different questions. Raising a loan can improve cash despite poor operations; buying a machine reduces cash without being an immediate full P&L expense.
The statement of changes in equity helps reconcile opening equity, profit, distributions, new capital and other movements. Not every equity movement flows through current-period profit. Read the notes for the relevant accounting treatment.
Reconcile before using a ratio #
Check opening and closing cash, borrowings and equity against the statements. A balance sheet and P&L copied from different reporting perimeters will not produce meaningful ratios.
Start with crore/lakh, period, consolidated/standalone, audited status and restatements. A spreadsheet that balances because a plug number was inserted is not a verified model.
Hypothetical worked example
A fictional machine purchase
A firm borrows ₹10 lakh and immediately buys a ₹10 lakh machine. Cash first rises and then falls by the same amount. Assets and debt both increase ₹10 lakh; there is no instant ₹10 lakh operating profit.
If annual depreciation is ₹2 lakh under the assumed policy, that expense affects later profit while debt repayment follows its own schedule. Ignore tax only for this simplified illustration.
Common mistakes
- Treating loan receipts as sales.
- Equating capex with immediate full expense.
- Mixing reporting perimeters or units.
A company borrows and buys a machine for the same amount. What happens immediately?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Desk assignment
What to submit
Draw a linked opening/closing balance sheet, P&L and cash-flow bridge for a fictional firm buying a machine on debt.
Use the research ledger for dated evidence, or the module workbooks for calculations. Separate observations, assumptions and interpretation.
Sources and further reading
- NISM: Research Analyst learning topics (scope reference; independent lessons) ↗
- NSE: company integrated financial filings ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.