Can you describe a financial model. How three statements are related to each other?

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Accepted Answer

A financial model is a tool used to forecast and analyze the financial performance of a company. The three statements - income statement, balance sheet, and cash flow statement - are interconnected and provide a comprehensive view of the company's financial health.

A financial model is a mathematical representation of a company's financial situation and future performance.
The income statement shows the company's revenues, expenses, and net income over a specific period.
The balance sheet presents the company's assets, liabilities, and shareholders' equity at a specific point in time.
The cash flow statement tracks the inflows and outflows of cash, providing insights into the company's liquidity and cash management.
The three statements are interrelated as the net income from the income statement affects the retained earnings on the balance sheet, while changes in assets and liabilities impact the cash flow statement.
For example, if a company reports higher revenues on the income statement, it may lead to an increase in cash inflows on the cash flow statement.
Financial models are crucial for decision-making, valuation, and assessing the financial viability of investments or acquisitions.

Can you describe a financial model. How three statements are related to each other?

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