C01 · Lesson 2 of 27 · 13 min · 5 hands-on tasks
The Three Statements Together
The income statement, balance sheet and cash flow statement aren't three separate reports. They're one machine with three dials. Post a store's first year and watch all three move, then answer the question every finance interview asks.
🎬 Situation
Ana has found the big numbers in Larkfield's report. But Dev's next question stumps her: "Profit was $75 million. So why did cash only go up $15 million?"
To answer, Ana needs to see the three statements as one machine. The easiest way: build a small one herself.
🎮 Play
One store's first year, all three statements at once. Larkfield opens a test store. Post each event and watch the balance sheet (the equation and the accounts), the income statement and the cash flow statement move together.
Balanced: every transaction changes both sides by the same amount.
| Account | Balance |
|---|---|
| Cash (asset) | $0 |
| Inventory (asset) | $0 |
| Store fittings (net) (asset) | $0 |
| Owed to suppliers (liability) | $0 |
| Bank loan (liability) | $0 |
| Larkfield's money in the store (equity) | $0 |
| Profit so far (equity) | $0 |
The interview question. Change a cost that uses no cash, like depreciation, and follow it through all three statements.
Assets and equity fall by exactly the same amount, so the balance sheet still balances. And cash went up: the tax bill shrank.
🏷️ Name it
| Link | From | To |
|---|---|---|
| Profit kept | Net income (income statement) | Retained earnings (balance sheet), minus dividends |
| Starting line | Net income | First line of cash from operations |
| Non-cash costs added back | Depreciation, amortisation | Cash from operations |
| Working capital | Changes in receivables, inventory, payables (balance sheet) | Cash from operations |
| Investing | Change in long-term assets | Capital expenditure on the cash flow statement |
| Financing | Changes in debt and equity, dividends | Cash from financing |
| The tie-out | Change in cash (cash flow statement) | Cash on the balance sheet |
🖍️ Like you're five: the income statement is your report card for the year, the balance sheet is a photo of your toy box on the last day, and the cash flow statement is the diary of every coin that went in or out of your piggy bank. They all describe the same year, so they must agree.
Why cash and profit differ: profit counts sales when they're earned and costs when they're used up. Cash counts them when money moves. The cash flow statement lists every reason, so the gap is never a mystery.
Real life: "Walk me through the three statements" and "depreciation goes up by $10, what happens?" are among the most common finance interview questions. Analysts build every financial model so that the balance sheet balances automatically through these links; if it doesn't, there's a mistake somewhere.
🔨 Do it: 5 tasks
0 / 5 doneTask 1 of 5 · The interview classic, part 1
Larkfield's depreciation rises by $10 million and its tax rate is 25%. Nothing else changes. By how much does net income change, in millions? (Use a minus sign for a fall.)
Task 2 of 5 · The interview classic, part 2
Same change. By how much does cash change, in millions?
Task 3 of 5 · Tie out retained earnings
Larkfield's retained earnings were $200M at the start of 2025. Net income was $75M and it paid $25M of dividends. What are retained earnings at the end of 2025, in millions?
Task 4 of 5 · Tie out cash
Cash was $45M at the start of 2025. Operating cash flow was $93M, investing −$68M, financing −$10M. What's cash at the end, in millions?
Task 5 of 5 · Bought on credit
Larkfield buys $30M of tents from a supplier, to pay in 60 days. Today, what changes?
🧩 Case: Profit up, cash flat
⭐ VIPDev reads Ana's notes. "Net income up 27%, from $59M to $75M. But operating cash flow only rose from $86M to $93M. Which number should we believe?"
What's Ana's best first answer?
What would you do? VIP members make the call, see what happens next across 2 decisions, and get the expert debrief.
🔁 Remember it
Where does net income go after the income statement?
A company repays $5M of a bank loan. Which statements change?
The change in cash on the cash flow statement should equal...
Net income flows into retained earnings on the balance sheet and is the first line of the cash flow statement. The cash flow statement explains, line by line, how the cash on last year's balance sheet became the cash on this year's. If the links don't tie, something is wrong.
📅 Use it Monday
Take one company's annual report and do the two tie-outs: last year's cash + the change in cash = this year's cash, and last year's retained earnings + net income − dividends ≈ this year's retained earnings. Small gaps usually have a note explaining them.
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