Three-statement integration
Linking the three statements
Link Rawdah's income statement, cash flow and balance sheet so the model balances, with cash from the cash flow.
Learning objectives
- Link the schedules into the income statement, cash flow and balance sheet
- Derive balance-sheet cash from the cash flow statement and roll equity forward
- Prove the model with balance and cash checks that hold when assumptions change
This is the model the track has been building towards. You have forecast Rawdah Home Retail Co.'s revenue, costs, working capital, PP&E and debt. Now you connect them so that a change to any assumption flows through all three statements and the balance sheet still balances.
An integrated model is what lenders, investors and boards rely on. It is also the centrepiece of most modeling tests: "build a three-statement model from these assumptions in 90 minutes". Rawdah Home Retail Co. is a fictional retailer; all figures are SAR millions and illustrative.
The links, in order:
- Income statement: depreciation from the PP&E schedule, interest from the debt schedule, then tax and net income.
- Cash flow (indirect): start from net income, add back depreciation, add the working-capital line from the schedule, subtract capex, add the debt flow, subtract dividends. Opening cash is last year's balance-sheet cash.
- Balance sheet: cash = cash-flow closing cash; PP&E, debt and working capital from the schedules; equity = last year + net income − dividends.
- Checks: total assets − total liabilities and equity = 0, and balance-sheet cash = cash-flow closing cash.
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