2.1.7 Connecting the Three Statements

Welcome to On Judgement. Your model balances only after inserting an unexplained £4m “other asset”. Have you solved the error? Take a first view. You can change it when you have considered the evidence.

Use clear historical inputs, assumptions and calculated outputs. Work from the income statement into cash flow and the closing balance sheet. A sale, cost, capital purchase or financing event should appear in every relevant statement, without being counted twice. Start with a small model whose transactions you understand; complexity is not evidence of analytical quality.

PP&E closes at opening PP&E plus capex less depreciation, assuming no other movements. Debt closes at opening debt plus new borrowing less principal repayment. Equity closes at opening equity plus profit less dividends in this simplified case. Cash closes through its own movement statement. Real roll-forwards can also include acquisitions, disposals, foreign exchange, revaluation and other equity changes; list exclusions explicitly.

In this case receivables rise from 40 to 48, inventory from 28 to 32 and payables from 32 to 35. Those changes explain the −8, −4 and +3 cash adjustments. A repayment to a supplier reduces cash and payables; it is not a new expense merely because cash leaves. Trace the transaction first, then decide the statement effects.

A zero balance-sheet check is necessary but insufficient. Two wrong entries can offset. Independently check cash, debt, equity, PP&E, signs and source totals. Never use an unexplained cash or asset plug to hide an error. Document a correction and rerun every dependent calculation. A model is a structured argument that someone else must be able to inspect.

Let's work through The complete Harbour roll-forward · £m. Opening balances: cash 26, receivables 40, inventory 28, PP&E 84; payables 32, other current liabilities 15, debt 49, equity 82. Use the profit/cash transactions in lessons 2.1.3–2.1.6. Pause here and try the calculation or reasoning before continuing.

Opening assets = 26 + 40 + 28 + 84 = 178; opening liabilities + equity = 32 + 15 + 49 + 82 = 178. PP&E = 84 + 12 capex − 6 depreciation = 90. Debt = 49 + 5 − 4 = 50. Equity = 82 + 24 profit − 6 dividends = 100. Cash = 26 + 21 − 12 − 5 = 30. Closing assets = 30 + 48 + 32 + 90 = 200; closing liabilities + equity = 35 + 15 + 50 + 100 = 200.

The £22m increase in total assets is funded by £4m more liabilities and £18m retained profit in this example. Independent roll-forwards explain the balance.

Now try the choices in this lesson. If your answer changes, identify the reason. Use independent checks rather than a balancing plug. Use the case activities to put the idea into your own words, and return to the evidence when more than one conclusion is defensible.