Connecting the Three Statements
How BS, P&L, and CFS lock together.
The three statements are not separate. They're one system viewed three ways. A professional checks that they agree, because inconsistencies between them are where manipulation shows. P&L → Balance sheet Net profit (minus dividends) flows into retained earnings, growing equity. P&L → Cash flow Cash flow starts from net profit, then strips out non-cash and timing effects. Balance sheet → Cash flow Changes in balance-sheet items (receivables, inventory, debt) drive the cash flow adjustments. Cash flow → Balance sheet The net change in cash equals the movement in the balance sheet's cash line. Profit of Rs 210 flows to retained earnings (balance sheet) and is the starting line of operating cash flow. If cash rose only Rs 40 while profit was Rs 210, the balance sheet will show why, receivables and inventory likely absorbed the difference. The integrity test: net profit, the change in equity, and the change in cash should all tell a consistent story. When they don't, that's your signal to dig.
Part of Learn NEPSE Investing, a free course on reading Nepali company accounts and charts. Section: The Annual Report.