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LINKING FINANCIAL
STATEMENTS IN RELATION TO
BALANCE SHEET, INCOME
STATEMENT AND CASHFLOW

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The Three Major Financial Statements:
How They're Interconnected

The information found on the financial statements of an

organization is the foundation of corporate accounting. This
data is reviewed by management, investors, and lenders for
the purpose of assessing the company's financial position.
 The balance sheet, income statement, and cash
flow statement each offer unique details with
information that is all interconnected. Together the
three statements give a comprehensive portrayal of
the company’s operating activities.
BALANCE SHEET

Also referred to as the

statement of financial
position, a company's
balance sheet provides
information on what the
company is worth from a
book value perspective.
INCOME STATEMENT

A company's income statement

provides details on the revenue a
company earns and the expenses
involved in its operating activities.
Overall, it provides more granular
detail on the holistic operating
activities of a company. Broadly,
the income statement shows the
direct, indirect, and capital
expenses a company incurs.
CASH FLOW

The cash flow statement

provides a view of a
company’s overall liquidity
by showing cash transaction
activities. It reports all cash
inflows and outflows over
the course of an accounting
period with a summation of
the total cash available.
How are the 3 Financial Statements Linked?

The 3 financial
statements are all linked
and dependent on each
other. In financial
modeling, your first job is
to link all three
statements together in
Excel, so it’s critical to
understand how they’re
connected.
Income Statement → Cash Flow Statement Linkages
To start, the cash flow statement is connected to the income
statement through net income.
The net income metric, or the “bottom line” of the income
statement, becomes the starting line item at the top of the cash flow
statement in the cash from operations section.
Cash Flow Statement → Balance Sheet Linkages
Conceptually, the cash flow statement is linked to the balance sheet
since one of its purposes is to track the changes in the balance
sheet’s working capital accounts (i.e. current assets and liabilities).

Income Statement → Balance Sheet Linkages

The income statement is connected to the balance sheet via retained earnings.
Of the portion of net income kept by the company, as opposed to being paid out
as dividends to shareholders, the remainder flows into retained earnings on the
balance sheet, which represents the cumulative sum of all net earnings (or
losses) of the company minus dividends issued to shareholders.
Accounting Principles

The income statement is not prepared on a cash

basis – that means accounting principles such as
revenue recognition, matching, and accruals can
make the income statement very different from the
cash flow statement of the business.

It’s the creation of the balance sheet through

accounting principles that leads to the rise of the
cash flow statement.
Net Income & Retained Earnings

The income statement is not prepared on a cash

basis – that means accounting principles such as
revenue recognition, matching, and accruals can
make the income statement very different from the
cash flow statement of the business.

It’s the creation of the balance sheet through

accounting principles that leads to the rise of the
cash flow statement.
Net Income & Retained Earnings
PP&E, Depreciation, and Capex
 Depreciation
Schedule?
A depreciation schedule is required in financial
modeling to forecast the value of a company’s fixed
assets (balance sheet), depreciation expense (income
statement), and capital expenditures (cash flow
statement).

Depreciation occurs as an economic asset is

used up. Different assets lose value at different
rates. A depreciation schedule helps to
calculate the differences.
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