$150 million of profit. No extra cash.
Harbor Coffee sells packaged coffee and runs coffee shops. Our fictional company reports $150 million of net income—its final accounting profit—for FY3. Yet it starts and ends the year with $105.4 million in cash.
Before deciding a number is wrong, pick the statement that could explain the flat cash balance: the income statement, balance sheet or cash flow statement.
Three questions, three statements
A reporting period is the stretch of time the results cover. Here we use FY3, the third year shown in Harbor's accounts. The statements give you three views of the same business:
| Statement | Question | Time |
|---|---|---|
| Income statement | Did it earn a profit? | During FY3 |
| Balance sheet | What does it have and owe? | At FY3 end |
| Cash flow statement | Where did cash go? | During FY3 |
A year-end balance is a snapshot. It tells you how much cash remained on that date, but not how much came in or went out. Profit, by contrast, belongs to a stretch of time.
FY2's closing position becomes FY3's opening position. In the timeline, the income statement and cash flow statement cover the activity between the two balance sheets.
The full reporting package also includes changes in shareholders' equity, comprehensive income and notes that explain the numbers.
Try to explain the unchanged cash
The cash flow statement answers the opening puzzle. Comparing the two balance sheets shows that cash was unchanged; cash flows explain why.
Harbor reports three types of cash movement for FY3, in millions of US dollars:
- Operating: +$180 million. Running the business generates this net cash.
- Investing: −$60 million. Harbor buys equipment, a long-lived asset.
- Financing: −$120 million. Harbor pays $60 million in dividends to shareholders and spends $60 million on buybacks, purchases of its own shares.
Financing also includes borrowing and repayments; Harbor takes on no new borrowing in FY3.
The map traces cash into the closing balance sheet. Its other path leads to retained earnings, the accumulated profit kept after dividends, within shareholders' equity. Add the three cash flows before reading the answer.
The calculated cash change is $180 million − $60 million − $120 million = $0. All the cash generated by operations goes into equipment and payments to owners.
For Harbor, $105.4 million + $0 = $105.4 million.
Flat cash does not mean nothing happened. A glance at the balance would miss both the equipment purchase and the payments to owners. Profit measures the year's business result; it is not the amount left after every cash payment.
The cash flow statement lesson explains why Harbor's $150 million profit also differs from its $180 million operating cash flow.
Where profit goes on the balance sheet
That $105.4 million ending cash appears on Harbor's FY3-end balance sheet as an asset, a resource the company holds. Beside assets are liabilities, its obligations, and shareholders' equity, the owners' claim after liabilities.
Profit reaches retained earnings instead. Start with the year's $150 million profit and subtract $60 million of dividends. That leaves $90 million to add to the prior balance:
$519.4 million + $90 million = $609.4 million at FY3 end.
The dividend reduces retained earnings without reducing the year's net income. Harbor records its $60 million buyback in treasury stock, a separate deduction from equity. That is why profit alone does not explain the change in total equity.
Retained earnings is not a second bank account. The retained profit can be tied up in equipment or other assets. Harbor ends FY3 with $609.4 million of retained earnings and $105.4 million of cash; those labels describe different things.
Find the same rows in a real report
Apple earned a profit in FY2024, too. Choose the row that tells you whether its cash rose or fell.
Source: Apple's FY2024 annual report, Item 8, filed November 1, 2024. Reported figures in USD millions for the year ended September 28, 2024; closing cash is at that date. Page numbers are printed pages.
| Row | Amount | Page |
|---|---|---|
| Annual net income | 93,736 | 29 |
| Closing cash and equivalents | 29,943 | 31 |
| Cash change (including restricted) | −794 | 33 |
The cash-change row on page 33 gives the answer: a $794 million decline despite a profit. The balance on page 31 tells you how much remained at year-end.
The filings guide offers an optional tour of the surrounding report and its notes.
Back at Harbor, choose the statement for each task: find the year's profit, find what it owes at year-end, and explain why cash stayed flat.
Income statement; balance sheet; cash flow statement. Three different questions about the same business.
Next, the income statement, line by line follows Harbor from sales to profit. You can use these reports to understand companies inside funds without choosing individual stocks.
In short
- The income statement tells you what a company earned or lost over a period.
- The balance sheet shows what it has and owes on one date.
- The cash flow statement explains how cash came in and went out.
- Profit, cash and equity connect, but one cannot stand in for another.
- Match periods, units and cash definitions before joining the rows.