How Do the 3 Financial Statements Link Together?

Net income connects profit, cash flow and equity

The income statement ends with net income. The indirect cash flow statement starts with that same profit, then adjusts for non-cash items and payment timing. Net income also increases retained earnings within equity; dividends reduce retained earnings. Model the income statement to explore the operating assumptions behind profit.

Depreciation links expenses and assets

D&A reduces earnings and the carrying value of assets without a cash payment in that period. The indirect cash flow statement adds it back to profit. That add-back reverses a non-cash expense; it does not create cash. Explore useful lives and timing with the depreciation and amortization schedule.

Capex becomes an asset before it becomes an expense

Buying equipment creates an investing cash outflow and increases PP&E. Depreciation then allocates its cost over its useful life. In this example, equipment bought at year-end starts depreciating in the next year over five years. Compare operating cash flow and capex in the free cash flow guide.

Working capital explains why profit is not cash

Unpaid sales increase receivables. Inventory ties up funds, while supplier credit creates payables. In indirect operating cash flow, increases in receivables and inventory reduce cash; increases in payables release cash. These are changes between periods, not the closing balances themselves. The working capital guide explains this bridge in more detail.

Debt connects funding and interest

Borrowing increases debt on the balance sheet and financing cash flow. Repayment reduces both. Interest reduces profit and, under this model’s convention, operating cash flow. Year-end borrowing affects subsequent interest rather than creating a full year of interest immediately. A cash shortfall is shown as required revolving funding; this is a modeling assumption, not evidence that a lender would provide credit.

Ending cash is the shared closing balance

Beginning cash + operating cash flow + investing cash flow + financing cash flow = ending cash. That same ending cash appears on the balance sheet. Use the last two forecast columns to see how a transaction can affect later periods as well as the selected year.

Why the balance sheet must balance

Assets = liabilities + equity. Every transaction has linked effects: a cash equipment purchase exchanges one asset for another, while borrowing increases both cash and liabilities. The example checks this identity and the cash bridge using unrounded engine values. Displayed amounts are rounded to EUR thousands. A balanced model can still contain unrealistic assumptions; the balance sheet model lets you inspect its drivers. The statement-dependency reference documents the source rows and dependencies behind the example.

Trace individual transactions through the statements

Explore a focused workflow for capex and depreciation, borrowing and repayment or dividends and retained earnings.

Connect statements over useful planning periods

The same dependencies apply to a monthly forecast or weekly forecast: flows aggregate over intervals, while stocks describe boundaries. A quarterly forecast gives a broader reporting interval.

A custom fiscal year determines annual and quarterly boundaries. Start by building a Three-Statement Model online.