Tying Together a Company’s 3 Financial Statements

A company’s three financial statements,(income statement, balance sheet and cash flow statement) all affect each other. Understanding what each one is, and how they are linked is helpful in getting a better picture of a company’s financials.

Above are examples of what the three financial statements could look like. There are three main categories to focus on that link the statements together: Net income, Depreciation & Capital Expenditures, and Financing.

Net Income and Retained Earnings

A company’s net income is it’s total profit minus taxes. It is located at the bottom of the Income statement, and at the top of the Cash Flow statement. On the balance sheet it is labeled as “retained earnings”, which represents the profits that are reinvested into the company, rather than being distributed as dividends.

Depreciation, Capital Expenditures and PP&E

“Depreciation” is added into Net Income to find the total cash flow from company operations. It is found on the income statement as an expense, and on the balance sheet underneath the PP&E asset section(Property Plant and Equipment). Capital Expenditures- the money a business spends maintaining assets- are also included in the PP&E section on the balance sheet. They feed into “Cash from Investing” on the cash flow statement.

Financing

Financing events, such as issuing debt, affect all three statements. The interest expense is on the income statement, the amount of debt owed is found on the balance sheet, and the change in amount owed is on the cash flow statement in the cash from financing section.

Cash Balance

The last step in figuring out if a company’s financials are balanced, once the above have been partaken, is finding the Cash Balance. Cash from operations, investing and financing are all added to the prior closing cash balance. It then becomes the current cash balance reflected on the balance sheet.