2.1.2 · 40–60 minutes · read, calculate, discuss, review
What you will learn
- Locate the three statements and their notes.
- Check units, periods, group scope and source versions.
- Trace a transaction across statements.
2.1 · Financial Statements
Find the source
Financial Statements · the work you will do
- 1Find the source
- 2Read the profit
- 3Follow the cash
- 4Test the forecast
Before you begin
A search result says revenue is “240”, but the report header says “£m”. A second source shows a different figure for the parent company. What must you check before using either number?
Write your first response before continuing.
Performance
Revenue → expenses → profit
Income statement · over a period
Position
Assets = liabilities + equity
Balance sheet · at a date
Cash
Opening cash + movements = closing cash
Cash-flow statement · over a period
Video coming soon · about 3 minutes
Reading Financial Statements: Part 2
Use the narration below while the recording is being made, then try the decisions in this lesson.
Read the full narration
Welcome to On Judgement. A search result says revenue is “240”, but the report header says “£m”. A second source shows a different figure for the parent company. What must you check before using either number? Take a first view. You can change it when you have considered the evidence.
Use the issuer’s investor-relations site or relevant official filing service. Record title, date, period, currency, units, page and whether figures relate to the consolidated group or a separate entity. Check restatements and comparative columns. An annual report, preliminary announcement and interim release can serve different purposes. Automated extraction is a convenience, not a replacement for inspecting the actual statement and notes.
Ask what was earned and expensed during the year, what resources and obligations existed at year-end, and why cash changed. These questions lead to the income statement, balance sheet and cash-flow statement. The notes explain accounting choices and detail behind totals. Financial institutions have different economics and presentation; this module starts with a simplified non-financial operating business.
A credit sale can raise revenue and receivables before cash arrives. Buying equipment for cash raises property, plant and equipment and reduces cash; subsequent depreciation is an expense and reduces its carrying amount. Profit contributes to retained earnings, but dividends and other movements also matter. A statement can be read alone for a specific question; a complete investment view needs the connections.
Separate a copied reported input from a calculation and an assumption. Label each cell or note with its source. When a total does not match, check units, continuing operations, gross/net presentation, acquisitions, foreign exchange and reporting dates before inventing an adjustment. A reviewer should be able to reproduce your calculation without trusting your memory or a chatbot’s confidence.
Let's work through A credit sale across the statements. In an isolated transaction, Harbour sells £20m of services on credit. All service costs have already been recognised elsewhere; ignore tax. At year-end the customer has paid £15m. Pause here and try the calculation or reasoning before continuing.
Revenue from this sale = £20m. Cash collected = £15m; closing receivable from this sale = £5m. In an indirect cash bridge, deduct the £5m rise in receivables from the profit effect to reach £15m cash.
The £5m is an asset awaiting collection, not an additional sale or an automatic loss. Check collectability and timing.
Now try the choices in this lesson. If your answer changes, identify the reason. Trace a transaction across statements. Use the case activities to put the idea into your own words, and return to the evidence when more than one conclusion is defensible.
Find the original document
Use the issuer’s investor-relations site or relevant official filing service. Record title, date, period, currency, units, page and whether figures relate to the consolidated group or a separate entity. Check restatements and comparative columns. An annual report, preliminary announcement and interim release can serve different purposes. Automated extraction is a convenience, not a replacement for inspecting the actual statement and notes.
Three questions, three statements
Ask what was earned and expensed during the year, what resources and obligations existed at year-end, and why cash changed. These questions lead to the income statement, balance sheet and cash-flow statement. The notes explain accounting choices and detail behind totals. Financial institutions have different economics and presentation; this module starts with a simplified non-financial operating business.
The links matter
A credit sale can raise revenue and receivables before cash arrives. Buying equipment for cash raises property, plant and equipment and reduces cash; subsequent depreciation is an expense and reduces its carrying amount. Profit contributes to retained earnings, but dividends and other movements also matter. A statement can be read alone for a specific question; a complete investment view needs the connections.
Create a reproducible source log
Separate a copied reported input from a calculation and an assumption. Label each cell or note with its source. When a total does not match, check units, continuing operations, gross/net presentation, acquisitions, foreign exchange and reporting dates before inventing an adjustment. A reviewer should be able to reproduce your calculation without trusting your memory or a chatbot’s confidence.
A credit sale across the statements
In an isolated transaction, Harbour sells £20m of services on credit. All service costs have already been recognised elsewhere; ignore tax. At year-end the customer has paid £15m.
- Revenue from this sale = £20m.
- Cash collected = £15m; closing receivable from this sale = £5m.
- In an indirect cash bridge, deduct the £5m rise in receivables from the profit effect to reach £15m cash.
The £5m is an asset awaiting collection, not an additional sale or an automatic loss. Check collectability and timing.
Put it into practice
1. Record a source
Choose a publicly available annual report. Log its issuer, period, currency, units and pages containing the three statements. Do not invent figures if a report is unavailable.
Record your response in your workbook before opening feedback.
Compare with a model response
A good log identifies the exact document/version and consolidated scope, with page references and a working link. This is a source-navigation exercise; any real-company conclusions need further analysis.
2. Trace equipment
Explain a £6m cash equipment purchase and £1m first-year depreciation under stated simplifying assumptions.
Record your response in your workbook before opening feedback.
Compare with a model response
Investing cash outflow £6m; PP&E initially rises £6m and then falls £1m through depreciation; profit falls £1m before tax. Add back that non-cash expense in the relevant indirect bridge without forgetting the capex.
3. Resolve a disagreement
Two revenue numbers differ: £240m group revenue and £180m parent-only revenue. Write a verification note.
Record your response in your workbook before opening feedback.
Compare with a model response
The numbers may both be correct for different scopes. Compare group with group, verify period/units, and retain the source labels. Do not average them.
Jargon buster
Consolidated
Combining a group under the applicable accounting basis.
Comparative
The prior-period figure presented alongside the current one.
Restatement
Revision of previously reported information.
Receivable
An amount owed to the business.
Capex
Expenditure on assets such as equipment, under the relevant definitions.
Source log
A record allowing inputs and calculations to be checked.
Knowledge check
Make each choice on the page. Feedback explains the reasoning. Use Try again after revisiting an idea.
AQA connection and further reading
AQA 7138: 3.1.4 financial management; Annexes 6–7 quantitative skills/formulae; AO2 application, AO3 analysis and AO4 evaluation. Detailed accounting policies, EPS and investment multiples are investing enrichment where used.
AQA 7138 specification
Primary curriculum mapping; teacher interpretation, not endorsement.
IAS 7 overview · IFRS Foundation
Accounting classification context. Presentation changes and effective/adoption dates must be checked for real reports.
Free Cash Flow Valuation · CFA Institute
Technical cross-check for consistent claims and valuation formulas; advanced optional reading.
Introduction to Valuation · Aswath Damodaran, NYU
Optional deeper reading on valuation approaches.
Take forward
Locate the three statements and their notes. Check units, periods, group scope and source versions. Trace a transaction across statements.