Financial Statements Tell Different Parts of the Same Story

Company A’s cash falls by THB 100,000 while equity rises by THB 300,000. Both can be true because the statements answer different questions. This episode reconciles the numbers rather than choosing whichever statement makes the company look strongest.

Keep the same fictional single-period case: opening cash and equity of THB 500,000, no debt, recognized revenue of THB 1,000,000, direct costs incurred and paid of THB 700,000, and customer collections of THB 600,000. There are no other transactions.

Overhead, depreciation, interest, income tax, VAT, and withholding tax are excluded to isolate the reconciliation. Real companies do not get to ignore these items. Revenue recognition is assumed to meet the applicable requirements; receiving an invoice or cash alone is not our recognition test.

Profit describes a period, not the bank statement

Our simplified income statement starts with THB 1,000,000 in revenue and deducts THB 700,000 in direct costs, leaving THB 300,000 in profit. Only because all other expenses are excluded does the direct-cost spread equal profit here. That equality must not be carried into a real business without checking the missing expenses.

The THB 400,000 not yet collected does not erase revenue under these assumptions. We assume it is an unconditional receivable. Its collectability still needs assessment. Recording a balance does not establish that the customer will pay in full or on time, and a different contractual condition could require a different classification.

Before using that profit to support another investment, ask which costs are omitted, whether the revenue can recur, and how many assets the business needs to earn it. The statement is a starting point for questions about economics, not a complete judgment about the quality or durability of the business.

The balance sheet shows where the value sits

At period-end, cash is THB 400,000 and receivables are THB 400,000, giving total assets of THB 800,000. Liabilities remain zero. Opening equity of THB 500,000 plus profit of THB 300,000 gives closing equity of THB 800,000. Assets therefore equal liabilities plus equity. This THB 800,000 is book equity, not the company’s market value. The additional equity is represented partly by a claim on the customer, not by additional bank cash.

A balance sheet is a position at a date, while income measures activity across a period. This matters when constructing ratios. Dividing annual profit by a single closing asset balance can distort interpretation when assets changed substantially. An average balance may be more informative, but the definition and period must remain explicit.

There is no need to calculate every ratio yet. First trace a balance back to the underlying transactions. Receivables rising because sales expanded may require a different response from receivables rising because old invoices are unpaid. A ratio becomes useful when it leads to a specific operational or financing question.

Reconcile profit with cash

The direct view takes collections of THB 600,000 less direct costs paid of THB 700,000, giving operating cash movement of negative THB 100,000 in this restricted case. With no investing or financing flows, cash falls from THB 500,000 to THB 400,000. This is a complete reconciliation only for the deliberately limited example.

The indirect view starts with THB 300,000 in profit and subtracts the THB 400,000 increase in receivables, again giving negative THB 100,000. Profit includes an amount not yet collected. Once that adjustment is included in operating cash flow, do not subtract the same receivable increase again when calculating free cash flow.

IAS 7 distinguishes operating, investing, and financing flows. OpenStax’s cash-flow chapter explains why accrual accounting creates timing differences. Use the statements together to investigate the cause, rather than treating one as true and the others as misleading.

Change one transaction and trace the effect

If the next period collects the entire THB 400,000 receivable with no new work, cash increases and receivables decrease. Total assets do not change from that collection alone, and the original revenue is not recognized again. This answer assumes there are no collection fees, impairment changes, or other transactions affecting the comparison.

If the company borrows THB 100,000, cash and liabilities rise equally. Borrowing itself does not increase profit; interest is a separate item. Buying equipment for cash exchanges cash for another asset when capitalization applies. It does not mean the entire purchase price is immediately an operating expense in every case.

For the exercise, write assets, liabilities, and equity before and after collection and show that both sides balance. Then label the source of each cash movement. The answer is not another ratio: it is a clear explanation of how the THB 300,000 profit ended up distributed across cash and receivables. That explanation prepares us to study working capital.