NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis

Financial Statements Overview for NISM Research Analyst

Updated 11 October 2026 · Fact-checked

Financial statements are the three core reports a company publishes: the balance sheet (position on a date), the profit and loss statement (performance over a period) and the cash flow statement (cash movement over a period). You solve questions by knowing what each shows, how they link, and where each item sits.

Understand Financial Statements Overview

A company reports its finances in three main statements. Each answers a different question. An analyst never reads one alone.

The balance sheet is a snapshot on one date. It lists assets (what the company owns), liabilities (what it owes) and equity (the owners' stake). It always balances: Assets = Liabilities + Equity. Assets and liabilities are split into current (due or usable within 12 months) and non-current.

The profit and loss statement (statement of profit and loss) covers a period, such as a year or a quarter. It starts with revenue, subtracts expenses, and ends with profit after tax. It is prepared on the accrual basis: revenue and expenses are recorded when earned or incurred, not when cash moves. So profit is not the same as cash.

The cash flow statement fills that gap. It shows actual cash in and out for the period, in three parts: operating, investing and financing activities. It starts from profit and adjusts for non-cash items and changes in working capital, or it lists direct cash receipts and payments.

The statements are linked. Net profit from the P&L goes into retained earnings (reserves) on the balance sheet, after dividends. The closing cash in the cash flow statement matches cash and cash equivalents on the balance sheet. An analyst checks that all three tell the same story. Strong profit with weak operating cash flow, or rising debt funding the dividends, is a warning sign. Notes to accounts and the auditor's report add detail and should also be read.

Key formulas to remember

Accounting equation: Assets = Liabilities + Shareholders' equity; The balance sheet must always balance on the reporting date.
Net profit (simplified): Revenue − Expenses (including tax) = Profit after tax; Shown over a period, on the accrual basis.
Net change in cash: Operating cash flow + Investing cash flow + Financing cash flow = Net change in cash; Opening cash + net change = closing cash, which ties to the balance sheet.
Retained earnings roll-forward: Closing reserves = Opening reserves + Profit after tax − Dividends (other adjustments aside); Shows how the P&L links to the balance sheet.
Current assets vs current liabilities: Working capital = Current assets − Current liabilities; Current means due or realisable within 12 months.

How to solve Financial Statements Overview questions

Use this method for any question on the three statements, from classification to linkage.

1Identify which statement the question is about: position on a date (balance sheet), performance over a period (P&L) or cash movement (cash flow).
2Classify the item. Is it an asset, liability, equity, income, expense, or an operating, investing or financing cash flow?
3Check the basis. Profit uses accruals; cash flow uses actual cash. Non-cash items such as depreciation are added back in cash flow.
4Apply the linking rule: profit less dividends goes to reserves; closing cash ties to the balance sheet.
5If numbers are given, use the accounting equation or the cash flow sum and recompute carefully.
6Eliminate options that mix up a snapshot with a period, or profit with cash.
7Pick the option that matches the exact definition.

Quickest way: Three-question check

When to use it: Use it for classification and concept MCQs when time is short.

Ask: date or period? Date means balance sheet. Period means P&L or cash flow.
Ask: profit or cash? Accrual means P&L. Actual cash means cash flow statement.
Ask: owned, owed or owners'? Then place it as asset, liability or equity.
For cash flow items, ask: day-to-day business (operating), buying or selling long-term assets or investments (investing), or raising or repaying capital and paying dividends (financing)?

Common mistakes in Financial Statements Overview

Treating profit as cash in hand.
Both are called 'earnings' in everyday talk.
Fix: Remember accrual versus cash. Credit sales raise profit but not cash until collected.
Saying the balance sheet covers a year.
It is published with annual results.
Fix: The balance sheet is a snapshot on one date. The P&L and cash flow cover a period.
Treating depreciation as a cash outflow.
It is an expense in the P&L.
Fix: Depreciation is a non-cash expense. It reduces profit but is added back in operating cash flow.
Putting dividends paid in operating activities.
Dividends come from profit.
Fix: Dividends paid to shareholders are a financing outflow in the standard classification.
Placing purchase of machinery in operating cash flow.
Machinery is used in operations.
Fix: Buying or selling long-term assets is investing activity.
Reading only the headline profit.
Questions often highlight net profit.
Fix: Compare profit with operating cash flow and check the balance sheet for rising receivables or debt.

Worked examples

Example 1

A company has total assets of ₹5,00,000 and total liabilities of ₹3,20,000. Opening reserves were ₹60,000, profit after tax for the year was ₹40,000 and dividends paid were ₹15,000. What is the shareholders' equity, and what are the closing reserves (ignoring other adjustments)?

Show the solution

Equity = Assets − Liabilities = ₹5,00,000 − ₹3,20,000 = ₹1,80,000.
Closing reserves = Opening reserves + Profit − Dividends.
= ₹60,000 + ₹40,000 − ₹15,000 = ₹85,000.

Answer: Shareholders' equity is ₹1,80,000 and closing reserves are ₹85,000.

Example 2

A company reports operating cash flow of ₹120 crore, investing cash flow of −₹80 crore and financing cash flow of −₹25 crore. Opening cash was ₹30 crore. What is the closing cash, and what does the pattern suggest?

Show the solution

Net change in cash = 120 + (−80) + (−25) = ₹15 crore.
Closing cash = Opening cash + Net change = 30 + 15 = ₹45 crore.
Operating cash funds both the investment (capex) and the financing outflows such as repayments or dividends, with cash left over.

Answer: Closing cash is ₹45 crore. Operations generate enough cash to fund investment and financing outflows, which is a healthy sign.

Exam tips

Expect classification questions: which statement shows an item, or which cash flow section it belongs to.
Watch for the words 'as on a date' versus 'for the year'. They decide between balance sheet and the other two.
Profit versus cash questions are common. Credit sales, depreciation and working capital changes are the usual traps.
On 1-mark MCQs with 25% negative marking, skip only if you cannot eliminate at least two options.
Study this with ratio analysis and cash flow analysis, as case-based questions combine them.

Practice questions from Company Analysis - Financial Analysis

Financial Statements Overview in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Financial Statements Overview: frequently asked questions

What are the three main financial statements?

They are the balance sheet, the profit and loss statement and the cash flow statement. Together with the notes to accounts, they give a full view of a company's position, performance and cash.

Why is the cash flow statement needed if there is a P&L?

The P&L uses the accrual basis, so profit can differ from cash. The cash flow statement shows actual cash generated and used, which tells you if profit is backed by cash.

How do the three statements connect?

Net profit less dividends adds to reserves on the balance sheet. Closing cash from the cash flow statement equals cash and cash equivalents on the balance sheet.

Do I need to do accounting entries for the NISM Research Analyst exam?

No. The exam tests how an analyst reads and interprets the statements, classifies items and links them. Basic calculations are enough.