The four financial statements and how they connect
What the income statement, statement of financial position, statement of changes in equity and cash flow statement each show, with one worked company whose figures tie across all four.
Financial statements · Updated 21 October 2026
A complete set of general-purpose financial statements has four primary statements and the notes. Each answers a different question, and each is incomplete without the others:
| Statement | Question it answers | Covers |
|---|---|---|
| Income statement (statement of profit or loss) | Did the business perform well this period? | A period |
| Statement of financial position (balance sheet) | What does it control and owe at the end? | A point in time |
| Statement of changes in equity | Why did the owners' interest change? | A period |
| Statement of cash flows | Where did cash come from and go? | A period |
The notes explain the accounting policies, the judgements and estimates behind the numbers, and the detail behind each line. Under IFRS the requirements for presentation currently sit in IAS 1; IFRS 18 replaces IAS 1 for annual periods beginning on or after 1 January 2027 (earlier application permitted), which changes the structure of the income statement but keeps the four statements. More on that below.
The income statement
The income statement shows revenue and the expenses incurred to earn it, on the accrual basis, for a period such as a month or a year. Typical subtotals are gross profit (revenue less cost of sales), operating profit, profit before tax and profit for the period. Under IFRS, items of other comprehensive income (such as certain revaluation gains) are presented with it, either in one statement of profit or loss and other comprehensive income or in two statements.
It tells you about performance, not cash. A sale on credit counts as revenue the day it's earned; a machine bought for cash doesn't appear as an expense at all except through depreciation.
The statement of financial position
This is the accounting equation at a date: assets = liabilities + equity. Under IFRS, assets and liabilities are normally split into current (expected to be realised or settled within twelve months or the normal operating cycle) and non-current. US GAAP balance sheets commonly list items in order of liquidity, with cash first; IFRS statements often show non-current assets first. The figures are the same either way.
The statement of changes in equity
This reconciles opening equity to closing equity, component by component: share capital, retained earnings and other reserves. The main movements are profit or loss, other comprehensive income, dividends, share issues and buy-backs. It's where you see what was earned and how much was paid out.
The statement of cash flows
This explains the change in cash and cash equivalents, split into operating, investing and financing activities. Because the other statements are prepared on the accrual basis, the cash flow statement is the one that shows whether the business generated cash from its trading. The cash flow statement guide works through it in detail.
One company, four statements: Larkspur Coffee Roasters
Larkspur Coffee Roasters Ltd prepares IFRS statements for the year ended 31 December 2026. At 1 January 2026 it had equity of 142,000 (share capital 100,000 and retained earnings 42,000).
Income statement for 2026
| Amount | |
|---|---|
| Revenue | 480,000 |
| Cost of sales | (264,000) |
| Gross profit | 216,000 |
| Wages | (98,000) |
| Rent | (36,000) |
| Depreciation | (12,000) |
| Other operating expenses | (14,000) |
| Operating profit | 56,000 |
| Finance costs | (6,000) |
| Profit before tax | 50,000 |
| Income tax (25%) | (12,500) |
| Profit for the year | 37,500 |
Statement of changes in equity for 2026
| Share capital | Retained earnings | Total | |
|---|---|---|---|
| At 1 January 2026 | 100,000 | 42,000 | 142,000 |
| Profit for the year | 37,500 | 37,500 | |
| Dividends paid | (15,000) | (15,000) | |
| At 31 December 2026 | 100,000 | 64,500 | 164,500 |
Statement of financial position at 31 December
| 2026 | 2025 | |
|---|---|---|
| Property, plant and equipment | 133,000 | 120,000 |
| Inventories | 36,000 | 30,000 |
| Trade receivables | 21,000 | 18,000 |
| Cash | 17,000 | 22,000 |
| Total assets | 207,000 | 190,000 |
| Share capital | 100,000 | 100,000 |
| Retained earnings | 64,500 | 42,000 |
| Total equity | 164,500 | 142,000 |
| Bank loan | 20,000 | 30,000 |
| Trade payables | 17,500 | 14,000 |
| Income tax payable | 5,000 | 4,000 |
| Total liabilities | 42,500 | 48,000 |
| Total equity and liabilities | 207,000 | 190,000 |
During the year Larkspur bought a new roaster for 25,000, repaid 10,000 of its loan and paid interest of 6,000 in cash (nothing was accrued at either year-end).
Statement of cash flows for 2026 (indirect method)
| Amount | |
|---|---|
| Profit before tax | 50,000 |
| Add: depreciation | 12,000 |
| Add: finance costs | 6,000 |
| Increase in trade receivables (21,000 − 18,000) | (3,000) |
| Increase in inventories (36,000 − 30,000) | (6,000) |
| Increase in trade payables (17,500 − 14,000) | 3,500 |
| Cash generated from operations | 62,500 |
| Interest paid | (6,000) |
| Income tax paid (4,000 + 12,500 − 5,000) | (11,500) |
| Net cash from operating activities | 45,000 |
| Purchase of property, plant and equipment | (25,000) |
| Net cash used in investing activities | (25,000) |
| Repayment of bank loan | (10,000) |
| Dividends paid | (15,000) |
| Net cash used in financing activities | (25,000) |
| Net decrease in cash | (5,000) |
| Cash at 1 January | 22,000 |
| Cash at 31 December | 17,000 |
This follows a policy, permitted under IAS 7 for 2026, of presenting interest paid within operating activities.
How the figures tie together
Follow the links and every statement checks another:
- Profit → equity. Profit of 37,500 from the income statement appears in the statement of changes in equity.
- Equity → statement of financial position. Closing retained earnings of 64,500 (42,000 + 37,500 − 15,000) and total equity of 164,500 appear on the statement of financial position.
- Cash flow → cash. The cash flow statement takes opening cash of 22,000 to closing cash of 17,000, the figure on the statement of financial position.
- Statement of financial position movements → cash flow. Every change between the two balance sheets is explained somewhere: receivables, inventory and payables in operating activities; property, plant and equipment through depreciation (12,000) and purchases (25,000): 120,000 + 25,000 − 12,000 = 133,000; the loan through the repayment; tax payable through the tax charge less tax paid.
- Dividends → two places. The 15,000 dividend reduces retained earnings and appears as a financing cash outflow. It never touches the income statement.
That interlocking is why analysts and interviewers ask "walk me through how a change flows through the three statements". If depreciation rose by 1,000 with tax at 25%, profit would fall by 750, operating cash flow would rise by 250 (the 1,000 add-back less the 750 lower profit, because less tax is payable), property, plant and equipment would fall by 1,000, and equity would fall by 750. Assets fall by 750 overall (−1,000 + 250 of cash, once the lower tax is paid), so the statement still balances. The statement linking lab lets you run exactly this kind of change.
What IFRS 18 changes from 2027
For annual periods beginning on or after 1 January 2027, IFRS 18 Presentation and Disclosure in Financial Statements replaces IAS 1. The main changes are to the income statement:
- Income and expenses are classified into defined categories — operating, investing, financing, income taxes and discontinued operations.
- Two subtotals become required: operating profit and profit before financing and income taxes.
- Management-defined performance measures (for example an "adjusted operating profit" used in public communications) are disclosed in a single note, with a reconciliation to the nearest IFRS subtotal.
- There are new principles for grouping and splitting items (aggregation and disaggregation) across the statements and notes.
Comparatives are restated when IFRS 18 is first applied. A company with a 31 December year-end that doesn't adopt early will first present under IFRS 18 for the year ending 31 December 2027, with 2026 comparatives restated. Consequential amendments to IAS 7 also change the cash flow statement from the same date — see the cash flow guide.
Common mistakes
- Putting dividends in the income statement. They are distributions to owners, shown in equity and in financing cash flows.
- Confusing profit with the change in cash. Larkspur made 37,500 of profit and its cash fell by 5,000.
- Showing capital expenditure as an expense. The roaster is added to property, plant and equipment; only depreciation reaches the income statement.
- Mixing points in time with periods. The statement of financial position is at a date; the other three cover the year.
- Ignoring the notes. Policies, estimates and commitments often matter more than the face of the statements.
Frequently asked questions
Which statement is most important?
None on its own. Profit without cash flow can hide collection problems; cash without profit can hide a business that is shrinking or living on borrowing.
Is "balance sheet" the same as "statement of financial position"?
Yes. IFRS uses "statement of financial position" but permits other titles; "balance sheet" is common, and US GAAP uses it.
What is "other comprehensive income"?
Gains and losses that IFRS requires or permits to bypass profit or loss — for example revaluation surpluses on property, and certain foreign-currency translation differences. Together with profit, they make up total comprehensive income.
Practise it
The free income statement lesson is the place to start, followed by the statement of financial position, the statement of changes in equity and how the statements connect. The equity reconciliation simulator and ratio analyser help you read what the numbers say. To put it together, the Northstar Trading case has you produce statements from a month of transactions, and The Financial Reporting Review case asks you to review a draft set. The IFRS financial reporting pathway goes further.
Sources checked
- IFRS Foundation — IFRS 18 Presentation and Disclosure in Financial Statements (accessed 21 October 2026)