How are the three statements linked?
That you can build a model in your head: every link is a formula in a three-statement model.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
Net income from the income statement is the first line of the cash flow statement, and also flows into retained earnings on the balance sheet. The cash flow statement then explains the change in cash, and ending cash is the cash on the balance sheet. Underneath, balance-sheet items drive the income statement: PP&E drives depreciation, debt drives interest, and changes in working-capital accounts drive operating cash flow.
The full answer
The main links, in the order a model calculates them:
| From | To | Link |
|---|---|---|
| Income statement: net income | Cash flow statement | First line of operating cash flow |
| Income statement: net income less dividends | Balance sheet | Added to retained earnings |
| Income statement: D&A | Cash flow statement, balance sheet | Added back to cash flow; reduces PP&E and intangibles |
| Balance sheet: change in receivables, inventory, payables | Cash flow statement | Working-capital adjustments in operating cash flow |
| Cash flow statement: capex | Balance sheet | Increases PP&E |
| Cash flow statement: debt raised or repaid | Balance sheet | Changes debt |
| Cash flow statement: ending cash | Balance sheet | Becomes cash |
| Balance sheet: debt and cash | Income statement | Drive interest expense and income |
The check that everything is linked: the balance sheet balances. If it doesn't, a flow on the cash flow statement isn't matched by a change on the balance sheet.
Mistakes to avoid
Listing only "net income goes to cash flow" — interviewers expect at least three or four links.
Forgetting dividends between net income and retained earnings.
Follow-ups they may ask
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