How the statements connect

The four primary statements describe the same ledger from different angles, and they are tied together by three links:

1. Profit for the period on the income statement flows into retained earnings in the statement of changes in equity.
2. Closing equity from that statement is the equity total on the statement of financial position.
3. The statement of cash flows explains the movement between opening and closing cash on the statement of financial position.

That fixes the order of preparation: income statement → statement of changes in equity → statement of financial position → statement of cash flows (which needs both balance sheets to compute the movements).

Why it matters. Because every entry has two sides, an accounting choice can never change one statement alone. Capitalising a cost instead of expensing it raises profit, raises assets and raises equity — and moves the cash outflow from operating to investing activities, without changing total cash. An error behaves the same way: an overstated closing inventory overstates profit, assets and equity this year, and because closing inventory becomes next year's opening inventory, it reverses next year by understating profit. That is called a counterbalancing error.

Cash is the one figure that accruals can't move. Depreciation, accruals, prepayments, inventory counts and estimates change profit and the balance sheet, but the bank balance is whatever the bank says. In the indirect cash flow statement, every non-cash effect on profit is cancelled by an equal and opposite adjustment, which is why a pure accounting change leaves total operating cash flow unchanged — a useful check on your work.