How exactly do the three statements connect?

Answer

Mechanics

The three statements are connected through three hard-wired linkages — every serious 3-statement model build stands or falls with them.

Income statement → balance sheet: net income flows through retained earnings into equity.
Income statement → cash flow statement: net income is the starting point of the indirect OCF method; non-cash items (D&A, stock-based comp, impairments) are added back.
Cash flow statement → balance sheet: closing cash sets the balance-sheet cash position; each CF section drives a different balance-sheet line.

Deep diveShow more details

Formulas

```
Retained earnings(t) = Retained earnings(t−1) + Net income − Dividends
Closing cash = Opening cash + ΔCash(CFO + CFI + CFF)
```

Sub-linkages

Capex from CFI drives PP&E, debt repayment from CFF reduces debt, and ΔAR / ΔInventory / ΔAP from CFO directly mirror the balance-sheet movements of the operating short-term positions.

Validation

The balance-sheet check `Assets − Liabilities & equity = 0` is the ultimate test — if it doesn't hold, one of the three linkages is wired up wrong.

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