The three financial statements
How the statements connect
Trace transactions through all three statements and roll a balance sheet forward until it balances.
22 minfoundationMembers
Learning objectives
- Trace a transaction through the income statement, cash flow statement and balance sheet
- Roll forward cash, PP&E and retained earnings from one balance sheet to the next
- Check that the closing balance sheet balances after a year of transactions
The three statements are not separate reports; they are three views of one set of books. Every financial model, and a large share of finance interview questions, depends on knowing how a change in one flows into the other two.
Once you can follow a transaction through all three, you can check any set of accounts for consistency, and you are ready to build a linked model.
The links
- Net income is the last line of the income statement and the first line of the cash flow statement.
- Net income − dividends is added to retained earnings on the balance sheet.
- Depreciation is an expense on the income statement, is added back in operating cash flow, and reduces PP&E (property, plant and equipment).
- Capex is an investing outflow and increases PP&E.
- Working-capital changes in the cash flow statement are the changes in balance-sheet receivables, inventory and payables.
- Closing cash from the cash flow statement is the cash on the closing balance sheet.
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