MarketLearn
Chapter 13Intermediate~10 min

How they connect

Net profit feeds equity, and cash movement links opening to closing cash.

The three statements are not three separate stories — they are a linked set. A figure that changes in one appears somewhere in the others. Understanding these links is what turns a pile of numbers into a picture of the business.

Link 1: profit flows into equity

When a company earns a net profit, it does not simply disappear. Whatever is not paid out to shareholders as dividends is kept in the business as retained earnings, which sits inside equity on the balance sheet.

Closing retained earnings = Opening retained earnings + Net profit − Dividends

Profit left in the business adds to equity; dividends reduce it.

Link 2: cash reconciles

The cash flow statement starts with the cash the company held at the beginning of the period and ends with the cash it holds at the end. The closing figure is the same cash you see as an asset on the balance sheet.

Closing cash = Opening cash + Operating + Investing + Financing cash flows

The three cash flows together explain the whole change in cash.

The three statements are one story

Each statement answers a different question — together they describe the whole business.

Income statement

  • Covers a period of time (e.g. a quarter or a year).
  • Starts with revenue and subtracts costs step by step.
  • Ends at net profit — which flows into retained earnings on the balance sheet.
Net profitRetained earnings (equity)Cash flow reconciliation
A single statement in isolation can mislead. Read the three together and they cross-check each other.
Follow the arrows: profit links to equity, and closing cash links to the balance sheet.
Because the statements are linked, they are prepared together and must agree. If the numbers do not tie up, something has been recorded wrongly — which is one reason auditors spend so long on them.

A habit worth building

A useful habit: whenever you see net profit, ask two follow-up questions — how much of it became cash, and how much of it stayed inside the business?

Key takeaways

  • The three statements are connected, not independent.
  • Undistributed net profit flows into retained earnings, which is part of equity.
  • Closing cash on the cash flow statement equals the cash shown on the balance sheet.
  • The statements must agree because they describe the same business.

Check your understanding

Every answer comes with an explanation — the goal is understanding, not a score.

Question 1 / 30%

A company began the year with retained earnings of ₹400 crore. It earned a net profit of ₹150 crore and paid dividends of ₹50 crore. What are its closing retained earnings?

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