Overview
The three core Financial Statements (Income Statement, Balance Sheet, Cash Flow Statement) are intrinsically linked, with figures flowing between them to provide a cohesive picture of a company’s financial health.
Key Links:
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Income Statement ↔ Cash Flow Statement
- Net Income from the IS is the starting point for the Cash From Operations (CFO) section of the CFS.
- Non-cash expenses (like Depreciation & Amortization (D&A)) from the IS are added back to Net Income in the CFO section.
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Cash Flow Statement ↔ Balance Sheet
- The Ending Cash Balance calculated on the CFS flows directly into the Cash Assets line on the BS for the current period.
- Changes in Net Working Capital (NWC) accounts (Current Assets like Accounts Receivable, Inventory; Current Liabilities like Accounts Payable) on the CFS reflect changes in those BS accounts.
- Capital Expenditures (Capex) from the Cash From Investing (CFI) section affects the Property, Plant & Equipment (PP&E) balance on the BS.
- Cash flows from issuing/repaying Debt or Equity, and Share Repurchases (Cash From Financing - CFF) impact the Liabilities and Shareholders’ Equity sections of the BS.
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Income Statement ↔ Balance Sheet
- Net Income from the IS, less any Dividends paid (shown on CFS), updates the Retained Earnings account in Shareholders’ Equity on the BS.
- Depreciation & Amortization (D&A) expense on the IS reduces the value of Property, Plant & Equipment (PP&E) and Intangible Assets on the BS.
- Interest Expense on the IS is typically calculated based on the beginning and ending Debt balances found on the BS.
Understanding these links is crucial for financial modeling and analysis.