The objective of the first video in this series is to explain and briefly walk through the process of building a fully integrated three-statement model. Initially a brief outline is provided detailing the sequence in which this model will be built. Keeping this sequence in mind as you build the model provides a good reference for progress made.
- Net income on the income statement grows retained earnings on the balance sheet.
- The cash flow statement starts with net income.
- Cash on the balance sheet links to cash on the cash flow statement.
- Links between the income statement, balance sheet and cash flow statement.
- Non-cash items from the income statement are added back to net income at the top of the cash flow statement (blue arrow below).
- Changes in working capital accounts from the balance sheet are recorded on the cash flow statement (green arrows below).
- Total interest expense links back to the income statement.
- Debt balances link back to the balance sheet.
- Repayment of debt appears on the cash flow statement under cash flow from financing activities.
- PP&E balance links back to the balance sheet.
- Depreciation links to the cash flow statement, where it is added back as a non-cash item.
- Capital expenditures appear on the cash flow statement under cash flow from investing activities.