02. Reading the financial statements together

Two independent verification paths recombining inside a valuation range while a failed fragment falls beyond an exit boundary — Image generated with OpenAI from the article topic

A balance sheet, income statement, and cash flow statement describe the same company from different angles. Read them together by following transactions. Hanbit Tools starts its first operating year with cash 100, bank debt 60, and equity 40. All amounts below are KRW million.

Establish the reporting boundary

Record the entity, period, currency, unit, and accounting framework before comparing numbers. Consolidated accounts include controlled subsidiaries under the applicable consolidation rules; separate parent accounts describe a different reporting boundary.¹ A complete reporting package also contains equity movements, notes, and other required statements and disclosures beyond these three introductory views.²

Our fictional distributor has no subsidiaries. The exercise omits VAT, deferred tax, leases, bad debts, foreign currency, dividends, and other comprehensive income. Interest and tax payments are classified as operating cash flows for this example, not as a universal rule for every reporting framework or period.

Follow the year's transactions

Transaction	Accounting effect	Cash movement
Buy inventory for 130, pay 110	Closing trade payable 20	−110
Sell goods costing 120 for 200; collect 150	Receivable 50, closing inventory 10	+150
Pay operating expenses	Expense 30	−30
Buy equipment for sales and administration	Asset cost 40	−40
Depreciate that equipment	Expense 8, net equipment 32	0
Pay bank interest	Expense 6	−6
Pay assumed 20% tax on pretax profit 36	Tax expense 7.2	−7.2

The equipment is ready for use at the start of the year. Its assumed five-year life, zero residual value, and straight-line depreciation produce the charge of 8. This distributor's depreciation is a sales and administration expense rather than part of inventory cost.

Reconcile profit and equity

Revenue 200 less cost of goods sold 120 leaves gross profit 80. Subtract operating expenses 30 and depreciation 8 to obtain EBIT 42. Interest 6 leaves pretax profit 36; assumed tax 7.2 leaves net income 28.8.

With no distributions or new shares, ending equity is 40 + 28.8 = 68.8. The closing balance sheet is:

Assets	Amount	Liabilities and equity	Amount
Cash	56.8	Bank debt	60
Receivables	50	Trade payables	20
Inventory	10	Equity	68.8
Net equipment	32
Total	148.8	Total	148.8

Reconcile the cash balance

Operating cash flow is 150 − 110 − 30 − 6 − 7.2 = −3.2. Equipment purchases produce investing cash flow of −40. Financing cash flow during the year is zero: the initial borrowing and share issue happened before the opening balance.

Consequently, ending cash is 100 − 3.2 − 40 = 56.8. Indirect operating cash flow reaches the same answer: 28.8 + 8 − 50 − 10 + 20 = −3.2. IAS 7 explains the cash flow categories and adjustments for noncash items.³

Try the connection yourself

Cover the ending cash figure and reconstruct it using both methods. Then explain why receivables appear as an asset while their increase is subtracted in the indirect cash flow calculation. You have recognized sales without collecting all the corresponding money. That timing difference will drive the next two chapters.

Continue reading

IFRS Foundation, IFRS 10 Consolidated Financial Statements. Control and consolidation. ↩
IFRS Foundation, IAS 1 Presentation of Financial Statements. Components of a complete reporting package; check the standards applicable to each report. ↩
IFRS Foundation, IAS 7 Statement of Cash Flows. Cash flow categories and indirect reconciliation. ↩

Sources

articleIFRS 10 Consolidated Financial StatementsIFRS Foundation articleIAS 1 Presentation of Financial StatementsIFRS Foundation articleIAS 7 Statement of Cash FlowsIFRS Foundation

Financial Statements to Stock Valuation2026-09-0601. What do you own when you buy a share?Distinguish ownership, book equity, and market capitalization with Hanbit Tools.

Financial Statements to Stock Valuation2026-09-0603. Why profit can fall while revenue growsSeparate revenue recognition and costs to explain falling profit amid growth.

Financial Statements to Stock Valuation2026-09-0604. Why a profitable company can run short of cashFollow receivables, inventory, and payables from reported profit to operating cash.

This is a personal research note, not investment advice