How the 3 Statement link each other?

Hello readers, welcome to the blog.

If you are preparing for an interview for a core finance role, there is one question that the interviewer will definitely ask you: “How do the 3 Statements link each other?”

So these questions make it easy to see if you read all the financial statements well.

You can try an answer like, First of the Income statement shows us the total revenue and total expenses of a company, leading the final figure of Income Statement is “Net Income” or can say “Profit”.

This net income flows into the Balance Sheet. It goes to the retained earnings section, which is part of Equity. Retain earnings represent the accumulated profit the company has kept over time after paying the dividend, if any.

Next, the Balance Sheet and Cash Flow Statement are connected through changes in assets, liability and equity.

For example, if a company make a sale on credit, accounts receivable will increase on the Balance Sheet, but the actual cash hasn't come in yet.

On the Cash Flow Statement, changes in working capital, like accounts receivable or accounts payable adjust the cash coming from operating activities.

The same applies the things like inventory or short-term liabilities; changes in these items on the Balance Sheet affect the company’s cash flow.

If the company invests in something, like buying new equipment, this will show up on the Balance Sheet as an increase in Fixed Assets.

This purchase would also show up on the Cash flow Statement. For example, taking a loan increases the liabilities on the Balance Sheet, and the loan proceeds appear in the financial activity section of the Cash Flow Statement.

Finally, at the end of the period, the cash balance of the Cash Flow Statement shows how much cash the company has generated or used during the period.

The final cash amount is then reflected on the Balance Sheet under the “cash” line item in an asset. So the Income Statement affects equity, the Balance Sheet shows changes in an asset and liabilities, and the Cash Flow Statement capture how cash flows in and out of the business.

The three Statements are always connected, giving a full picture of the company's financial position.

Thanks for reading

Growth Inshots