How are the Three Financial Statements Linked?

The 3 financial statements each offer unique details with information that is all interconnected and, together, provide a comprehensive portrayal of the company’s business activities. You must integrate the Income Statement, Balance Sheet, and Cash Flow Statement to create an accurate model. These three financial statements work together, providing a complete structure for any monetary model. The cash flow statement helps a company understand its liquidity and shows how well it generates cash to meet its debt obligations, operations, and investments. Therefore, business owners can alter processes moving forward in an effort to improve cash flow. Assets, or what the company owns, are balanced by the company’s obligations (liabilities) and the equity invested by its owners (shareholders’ equity).

Balance sheet example

These items need to be added back to the net income figure on the income statement. This means it doesn’t wait for cash to change hands; it records revenue when earned and expenses when incurred, making it different from the cash flow statement. The net income from this statement connects directly to both the Balance Sheet and the Cash Flow Statement.

These three core statements are intricately linked to each other and this guide will explain how they all fit together. By following the steps below, you’ll be able to connect the three statements on your own. You need all three, the Profit & Loss account, the Balance Sheet, and the Cash Flow Statement.

• Our team offers specialized support for financial modeling, ensuring alignment with industry standards and providing the insights you need to make informed decisions.
• The ending cash balance calculated on the cash flow statement (CFS) is the current period cash balance on the balance sheet.
• All intra-group balances and investments in subsidiaries are eliminated during consolidation, in line with the IFRS 10 and IAS 27 standards.
• This impacts the company’s investment activities and future earnings potential.

The Cash Flow Statement: The Real Movement of Money

• For the Cash from Financing section, we have one inflow of cash, which is the raising of capital through debt issuances, which represent cash inflows, since debt is raised in exchange for cash from lenders.
• Trying to consolidate accounts manually using spreadsheets or siloed systems introduces risks at every stage.
• Solving for the net cash flow and adding the beginning cash balance (for the period) will get you to the new/ending cash balance.
• It includes some expenses that don’t involve new cash going out during the period (like depreciation, where the cash was spent earlier and is now being allocated over time).

These statements are essential for evaluating a company’s financial performance and position. They provide a comprehensive snapshot of a business’s financial health and are used by internal management and external stakeholders, such as investors, analysts, and creditors. Net income from the profit and loss statement directly impacts the balance sheet by altering retained earnings in shareholders’ equity. The link is very important and shows how profits or losses change the overall equity. Once dividends are distributed, leftover net income is retained earnings by the company.

Profit and Loss Statement

Financial modeling is the process of creating a summary of a company’s expenses and earnings that can be used to calculate future decisions. With information from the three major financial statements, you can create a financial model to forecast your company’s future financials based on historical data. Investors might prioritize the profit and loss statement for profitability and growth potential.

PP&E, Capital Expenditures (Capex) and Depreciation Expense

The process reveals how a company’s operational performance and financing how are the three financial statements linked decisions affect its overall financial position. Understanding how the income statement, balance sheet, and cash flow statement interconnect is fundamental to financial modeling, yet it can be difficult to maintain consistency across statements. Artificial intelligence addresses this challenge by automatically validating links between reports and identifying hidden discrepancies.

After spreading the cost evenly over the three equipment’s asset useful life’s (this is called “straight-line deprecation”), total D&A for each of the five years can be summed. This then flows into the D&A expense on the income statement, and is added back on the cash flow statement (again, because it’s a non-cash expense). Accumulated depreciation on the balance sheet (under non-current assets) is then calculated by adding the prior period’s accumulated depreciation to the D&A expense for the period from the income statement. For the profit and loss statement, depreciation is an expense and reduces net income.

With a proven track record of driving profitable business decisions and contributing to company growth, Ehab has become a trusted leader in FP&A. The income statement not only shares the monetary value of a business but also relays the positive or negative performance of each department. Understanding these connections is crucial for thorough financial analysis, with information flowing between each of the statements in different ways. Whether you’re a student of finance, a stock investor, or someone just interested in business, you need to understand this connection.

As you can see in the image above, total CapEx is equal to the sum of the fixed asset dollar amounts (for the lemon crusher, ice machine, and refrigerator). This is also known as property, plant and equipment (aka PP&E) and shows up under investing activities on the cash flow statement. Once you have adjusted for non-cash items on the income statement, you need to make changes to the balance sheet. The balance sheet shows a company’s assets, liabilities, and equity at a specific point in time. To connect the balance sheet to the income statement, you need to adjust the figures for any changes that have occurred during the period covered by the income statement. The three core statements are the income statement, balance sheet, and cash flow statement.

How the Three Financial Statements Are Linked

Acquirers are also likely to pay over the asking price of the acquiree because of “goodwill,” which is an intangible asset. This complete linkage also includes a few items that were not discussed thoroughly in the net income and depreciation linkage examples above. These items are net working capital, financing, and acquisitions, as covered in the sections below. For this example, this ending cash balance represents the real cash balance at the end of the company’s fiscal year. This number then flows into the cash line item (typically shown as “cash and equivalents”), which is a current asset on the balance sheet.