Module I· Interview Essentials AccountingBasic
Question
Classic question: how do the three statements link together?
Answer
Core linkages
- Net income from the income statement starts the indirect cash flow statement.
- Net income minus dividends flows into retained earnings on the balance sheet.
- D&A is added back in cash flow and reduces PP&E / intangible assets over time.
- Capex reduces cash and increases PP&E.
- Debt issuance / repayment changes cash and debt.
- Ending cash from the cash flow statement becomes cash on the balance sheet.
Check
The balance sheet must balance after every linkage.