How do the 3 statements link together?
Answer
See below diagram:
Example:
To tie the statements together, net income from the income statement flows into shareholders equity on the balance sheet, and into the top line of the cash flow statement
Changes to balance sheet items appear as working capital changes on the cash flow statement, and investing and financing activities affect balance sheet items such as PP&E, Debt and Shareholder’s Equity. The Cash and Shareholders’ Equity items on the balance sheet act as plugs, with Cash flowing in from the final line on the Cash Flow Statement
Why this matters to bankers
Bankers need to understand how each financial statement relates to each other to create models to evaluate and forecast the performance of a business. When you see something change month-to-month or quarter-to-quarter, you should have an immediate understanding of how that change impacts the three statements.