Name the main financial statements and explain how they are linked.

What the interviewer wants to hear

• Statement of profit and loss shows performance for a period
• Balance sheet shows financial position at a date
• Cash flow statement shows cash movements
• Profit flows into retained earnings in equity
• Cash flow ends with the cash balance on the balance sheet

Model answer

The main statements are the statement of profit and loss, the balance sheet, the cash flow statement and the statement of changes in equity, supported by notes. Profit and loss shows income and expenses over a period and the resulting profit. The balance sheet shows assets, liabilities and equity at the period end date. The cash flow statement shows where cash came from and went, split into operating, investing and financing activities. They connect in a clear way: profit for the year flows into retained earnings in the equity section of the balance sheet, which the statement of changes in equity also shows. The cash flow statement starts from profit, adjusts for non-cash items and working capital changes, and ends at the closing cash balance, which must match cash on the balance sheet. If these links do not tie, something is wrong.

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