Three Statement Model Links

Most of the detail in what might otherwise appear to be a complex three statement financial model is simple math (not always, but frequently). I have found that if the principle relationships linking the three primary financial statements are well known, it makes understanding the rest of the model an easier exercise.

 INCOME STATEMENT (blue arrow):

1. Net income on the income statement grows retained earnings on the balance sheet.
2. The cash flow statement starts with net income.

BALANCE SHEET (purple arrow):

1. Cash on the balance sheet links to cash on the cash flow statement

CASH FLOW STATEMENT:

1. Non-cash items from the income statement are added back to net income at the top of the cash flow statement (blue arrow).
2. Changes in working capital accounts from the balance sheet are recorded on the cash flow statement (green arrows).

DEBT SCHEDULE (orange arrows):

1. Total interest expense on the income statement.
2. Debt balances on the balance sheet.
3. Repayment of debt on the cash flow statement.

PP&E SCHEDULE (red arrows):

1. PP&E balance on the balance sheet.
2. Depreciation on the cash flow statement.
3. Capital expenditures on the cash flow statement.