The Three Financial Statements
Definition
The income statement, balance sheet, and cash flow statement are the core reports a company files. The income statement shows profitability over a period; the balance sheet shows financial position at a point in time; the cash flow statement reconciles accrual-based net income to actual cash movement over a period.
They link together: net income from the income statement flows into retained earnings on the balance sheet and is the starting line of the cash flow statement (under the indirect method). The ending cash balance on the cash flow statement ties to cash on the balance sheet, and non-cash items like depreciation affect both PP&E and net income.
In practice, no single statement is sufficient. The income statement can be distorted by non-cash and one-time items, the balance sheet reflects historical cost for many assets, and the cash flow statement lacks a profitability view, so analysts use all three together.
Why interviewers ask
"Walk me through the three statements and how they link" is arguably the single most common IB technical question, often followed by "if depreciation goes up by $10, walk me through the impact on all three statements." The classic trap is forgetting the tax effect (a $10 depreciation increase reduces net income by $10 times one minus the tax rate, not $10) or failing to make the balance sheet balance at the end.
Related terms
Interviews don't test definitions — they test recall under pressure.
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