How exactly does net income flow into the balance sheet?

Answer

Mechanics

Net income flows through retained earnings into equity. The roll-forward formula:

```
Retained earnings(t) = Retained earnings(t−1) + Net income(t)
− Dividends(t) − Share buybacks(t, from RE) ± OCI(t)
```

Important

Net income does NOT go directly into cash. Cash moves exclusively through the cash flow statement — depending on working-capital changes, capex, debt drawdowns, and the like. A company can report net income of 100 and generate cash of 0 or negative if AR and inventory rise by 100+.

Deep diveShow more details

Pitch tip

This separation of profit and cash is why IB valuation is primarily based on FCF/EBITDA, not net income — and why earnings-quality analysis is mandatory in every due diligence.

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