📒 The three financial statements, built from a chai stall

🎯 In 30 seconds: Every listed Indian company reports three statements. The statement of profit and loss (P&L) shows whether it made a profit over a period. The balance sheet shows what it owns and owes on one date. The statement of cash flows shows where the actual cash came from and went. They are linked: profit feeds the balance sheet, and the cash flow statement explains the change in cash. Indian companies also report standalone and consolidated numbers, and every annual set comes with an auditor's report you should read before trusting the rest.

Why a trader should care

A share is a slice of a business. The financial statements are that business's report card, written in a standard format and filed with the stock exchanges.

Even if you hold shares for days, the numbers matter. Quarterly results move prices more than almost anything else, and you cannot judge a "beat" or a "miss" if you do not know what the lines mean. Results season covers what happens on the day.

The good news: the core ideas fit inside one small business. We will build a hypothetical chai stall, Kadak Chai, and follow every rupee through its first year. All the numbers are made up, and every one of them ties out.

Meet Kadak Chai on day one

Two friends start a chai stall near a college gate. They put in ₹3,00,000 of their own money and borrow ₹1,50,000 from a bank. Money the owners put in is equity. Money borrowed is a liability, something the business owes.

On day one they spend ₹2,40,000 on a cart, a gas stove, kettles, a small fridge and a signboard. That is equipment (accountants call it property, plant and equipment), an asset that will be used for years. They keep the other ₹2,10,000 as cash.

That little table is already a balance sheet. The two halves are equal, and they always will be, because of one rule:

Assets = Equity + Liabilities

Everything the business owns was paid for either with the owners' money or with borrowed money. There is no third source. That is why the sheet "balances".

Statement 1: the statement of profit and loss

The statement of profit and loss covers a period: a quarter or a financial year, which in India normally runs from 1 April to 31 March. It starts with revenue at the top and subtracts expenses until it reaches profit at the bottom. That is where "top line" (revenue) and "bottom line" (profit after tax, or PAT) come from.

Here is what Kadak Chai did in year one:

• Sold ₹12,00,000 of chai and snacks. ₹11,40,000 was received in cash and UPI. An office canteen that orders in bulk still owes ₹60,000.
• Used ₹3,60,000 of milk, tea leaves, sugar, ginger and paper cups to make what it sold.
• Paid ₹4,20,000 in wages to two helpers, ₹90,000 for the spot and the licence, and ₹30,000 for posters and a delivery app listing.
• Paid ₹15,000 interest on the loan (10% of ₹1,50,000) and ₹57,000 in income tax.

The line names above follow the wording Indian companies use. Four terms need a plain definition:

• Cost of materials consumed: the direct cost of what was sold. Milk used, not milk bought.
• Depreciation: the ₹2,40,000 of equipment wears out, so its cost is spread over its useful life instead of being counted all in year one. Kadak Chai assumes five years: ₹2,40,000 / 5 = ₹48,000 a year. No cash leaves for depreciation in year one. The cash left on day one, when the cart was bought.
• Operating profit, or EBIT: earnings before interest and tax. It tells you whether the core business works, regardless of how it is financed. Add depreciation back and you get EBITDA (₹3,00,000 here), a number you will meet in Valuation ratios.
• Profit after tax: what is left for the owners after every expense, interest and tax.

Revenue is counted when the sale is earned, not when the cash arrives. That is why the ₹60,000 the canteen still owes is already in revenue. This is accrual accounting, and it is the main reason profit and cash differ. SEBI's listing rules require listed companies to prepare results on an accrual basis.

Two more lines appear on a real Indian P&L below profit after tax. Other comprehensive income (OCI) collects some gains and losses that accounting rules keep out of profit, such as certain changes in the value of pension obligations or investments. Profit plus OCI gives total comprehensive income. When people quote "profit", they almost always mean profit after tax, before OCI.

Statement 2: the balance sheet

The balance sheet is a snapshot on one date, usually 31 March for the annual report, or 30 September for the half year. Indian balance sheets list assets first, then equity and liabilities:

• Assets: what the business owns or is owed. Split into non-current (used for more than a year, like equipment) and current (cash, trade receivables from customers, inventories of goods waiting to be sold).
• Equity: the owners' claim. Equity share capital (the face value of shares issued) plus other equity, which includes retained earnings, all past profit kept in the business instead of paid out.
• Liabilities: what it owes. Trade payables (bills from suppliers not yet paid) and borrowings, again split into current and non-current.

During the year Kadak Chai also did five things that never touch the P&L. It bought ₹30,000 more supplies than it used (inventory). It still owed a dairy ₹15,000 at year end (payables). It paid the owners a ₹30,000 dividend. It repaid ₹30,000 of the loan. And on the last day of the year it bought a second cart for ₹60,000.

Retained earnings went from ₹0 to ₹1,50,000: profit after tax of ₹1,80,000 minus the ₹30,000 dividend. That one line is the bridge between the P&L and the balance sheet.

Statement 3: the statement of cash flows

Kadak Chai earned ₹1,80,000 of profit, but its cash rose only ₹33,000. Where did the rest go? The statement of cash flows answers that. It sorts every rupee into three buckets:

• Operating activities: cash from running the business.
• Investing activities: cash spent on or received from long-term assets and investments. Spending on equipment and buildings is capital expenditure, or capex.
• Financing activities: cash from or to lenders and owners. Borrowing, repaying loans, issuing shares, paying dividends, buying back shares.

Most Indian companies build the operating section with the indirect method: start from profit and adjust for everything that was not cash. (Real statements usually start from profit before tax and show tax paid as a separate line. We start from profit after tax to keep it short. The answer is the same.)

You can check the operating figure a second way, by counting only cash that actually moved. Collected from customers: ₹11,40,000. Paid out: ₹3,75,000 to suppliers (₹3,90,000 of supplies bought, ₹15,000 still owed), ₹4,20,000 wages, ₹90,000 rent and licence, ₹30,000 marketing, ₹15,000 interest and ₹57,000 tax, a total of ₹9,87,000. ₹11,40,000 - ₹9,87,000 = ₹1,53,000. Same answer.

One number analysts care about most: free cash flow, which is cash from operations minus capex. For Kadak Chai: ₹1,53,000 - ₹60,000 = ₹93,000. That is the cash the business produced that the owners could take out without shrinking it. You will use it again in Valuation ratios and Building a stock thesis.

One Indian detail: the accounting standard on cash flows (Ind AS 7) gives some choice over where interest and dividends go. Many Indian companies put interest paid under financing, not operating. When you compare two companies' operating cash flow, check where each one put interest, or you may be comparing different things.

How the three connect

Change one number and the others must change with it. That is why analysts talk about a three-statement model, and why a company cannot easily fake one statement without the others starting to look strange.

Ten years later: Kadak Chai Ltd lists on the exchange

Say Kadak Chai grows into hundreds of outlets, converts into a public limited company and lists its shares through an IPO (see Why companies sell shares). The three statements keep the same shape, with more lines and bigger numbers. Four things change.

1. The rules are Ind AS. Listed companies in India prepare their accounts under the Indian Accounting Standards (Ind AS), notified by the Ministry of Corporate Affairs under section 133 of the Companies Act, 2013 and based closely on international IFRS standards. Companies listed only on the SME platforms are generally exempt and use the older Indian Accounting Standards (AS), which is one more reason SME numbers are harder to compare with mainboard companies. Banks, insurers and some finance companies follow their own sector rules and formats, set with the RBI and IRDAI.

2. It reports earnings per share (EPS). EPS is profit after tax attributable to shareholders divided by the number of shares. Diluted EPS also counts shares that could be created from employee stock options (ESOPs) and convertible securities.

Prefer diluted EPS. It shows your slice if every option turned into a share, which is closer to what you actually own. Notice that face value (₹10) has nothing to do with any of this. It is a legal number on the share certificate, not a measure of worth.

3. It reports standalone and consolidated results. Kadak Chai Ltd now owns a packaged-tea subsidiary and 60% of a café chain in the Gulf. The standalone statements show the listed company on its own. The consolidated statements add up the parent and everything it controls, as if they were one business. The 40% of the café chain owned by outsiders appears as non-controlling interest, so you can see which part of the profit belongs to Kadak Chai's shareholders.

For most companies with real subsidiaries, consolidated numbers are the ones that describe what you own. Standalone numbers can mislead in both directions: a parent can look healthy while its subsidiaries carry the debt, or look weak because the profit sits in a subsidiary. Always check which set a headline, a screener or a social media post is quoting.

4. It files on a fixed timetable. SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, regulation 33, set the timing:

So the P&L arrives every quarter, but the balance sheet and cash flow statement arrive only twice a year, with the September and March results. A limited review is a lighter check than a full audit. The full annual report, with every note and the auditor's complete report, comes later, before the annual general meeting.

The auditor's report: read it first

Every annual set of statements comes with a report from the statutory auditor, a chartered accountant firm appointed by the shareholders. It is short, and it is the first thing worth reading.

• The opinion. An unmodified ("clean") opinion says the statements give a true and fair view. A qualified opinion says "true and fair, except for" something specific. An adverse opinion says they are not true and fair. A disclaimer says the auditor could not get enough evidence to form an opinion at all. Anything other than unmodified is serious. Listed companies must file a Statement on Impact of Audit Qualifications with annual results when the opinion is modified.
• Key audit matters. For listed companies, the auditor describes the areas that took the most judgment: revenue recognition, valuation of inventory or goodwill, a big lawsuit. This tells you where the numbers are softest.
• Emphasis of matter and material uncertainty. Paragraphs that draw your attention to something without changing the opinion. A "material uncertainty related to going concern" means the auditor has doubts the company can keep operating.
• The CARO report. An annexure under the Companies (Auditor's Report) Order, 2020, where the auditor answers set questions about things like loans to related parties, defaults to lenders and unpaid statutory dues, for the company's standalone accounts.

The notes: where the real story sits

The notes to accounts are part of the audited statements, and they are often longer than the statements themselves. Five notes repay the time:

1. Significant accounting policies. How the company recognises revenue and depreciates assets. A change here can lift profit without any change in the business.
2. Related party transactions. Sales, purchases, loans and fees with promoter-group companies, directors and their relatives. Common in India, often legitimate, sometimes the leak in the bucket. Measuring business quality shows how to read it.
3. Contingent liabilities and commitments. Tax disputes, guarantees given for other companies and legal claims that are not on the balance sheet but could become real.
4. Borrowings. Interest rates, repayment dates and what is pledged as security.
5. Segment information. Revenue and profit by business line or region, so you can see which part is actually earning.

How to read a real set of statements

1. Find the latest annual report on the company's website, or on the NSE or BSE site under corporate filings. Reading company filings shows where each document lives.
2. Read the auditor's report first. Clean opinion? Any key audit matters or emphasis paragraphs?
3. Decide whether you are reading standalone or consolidated, and stick to consolidated unless you have a reason not to.
4. P&L: is revenue growing? Is your own gross margin calculation steady? Is operating profit positive?
5. Balance sheet: how much cash against borrowings? Are receivables or inventories growing much faster than revenue?
6. Cash flows: is cash from operations close to or above profit after tax? What is free cash flow after capex?
7. Line up at least three years side by side. One year tells you almost nothing about a trend.

Try it

Rebuild Kadak Chai's year one with one change: the office canteen pays its ₹60,000 before 31 March. Work out the new receivables, cash from operations and ending cash. (Answer: receivables ₹0, cash from operations ₹2,13,000, ending cash ₹3,03,000. Profit does not change, and total assets stay at ₹5,85,000, because ₹60,000 simply moved from receivables to cash.)

Then pick any listed company whose products you use. On the NSE website, open its page and go to corporate filings, financial results, and download the latest annual results. In a notebook or spreadsheet, write down five consolidated numbers for three years: revenue from operations, profit after tax, cash and cash equivalents, total borrowings and cash from operating activities. Note the auditor's opinion type. Then write one sentence on which way each number is moving.

Sources

• SEBI: Listing Obligations and Disclosure Requirements Regulations, 2015 (last amended 15 October 2026), regulation 33 and Schedule III
• Ministry of Corporate Affairs: Accounting Standards (Ind AS and AS)
• ICAI: Companies (Auditor's Report) Order, 2020 applicability
• NSE: Corporate filings, financial results