1.3·7 min read
How the Statements Link
Three connections wire the statements into one system: net income, the change in cash, and retained earnings.
By the end you can
- ✓Name the three links between the statements
- ✓State the accounting identity the balance sheet must obey
A three-statement model is powerful because the statements are connected. Change one assumption and all three respond - which doubles as a built-in error check.
- Net income flows from the bottom of the to the top of the , and into retained earnings on the .
- The cash flow statement explains the change in cash, and its ending cash balance lands on the .
- Balance-sheet account changes drive the cash flow statement - a rise in receivables or uses cash; a rise in payables provides it.
Interconnection is the error check
Because the three statements share these links, an inconsistent assumption breaks the . Pros rely on 'does it still balance?' as the first sign the model is sound.
Check yourself
Where does net income appear besides the income statement?
Practice in the simulator
Lock it in by building it yourself in a live, graded spreadsheet.