Linkage between balace sheet, income statement and cash flow statement

Question

Accepted Answer

The balance sheet, income statement, and cash flow statement are interconnected financial statements that provide a comprehensive view of a company's financial performance.

The balance sheet shows a company's assets, liabilities, and shareholders' equity at a specific point in time.
The income statement shows a company's revenues, expenses, and net income over a specific period.
The cash flow statement shows the inflows and outflows of cash from operating, investing, and financing activities.
Changes in the balance sheet accounts affect the income statement and cash flow statement.
For example, an increase in accounts receivable on the balance sheet indicates higher sales on the income statement, but it may also result in lower cash flow if customers haven't paid yet.
The cash flow statement reconciles the net income from the income statement with the actual cash generated or used by the company.
Understanding the linkage between these statements helps analyze a company's financial health and performance.

Accepted Answer

There are 2 methods

Direct method

Indirect method

The later is very prominent method and in this there are three activities

Operating activities

Investing activities

Financing activities

We usually construct a cash flow statement from income statement and balance sheet. Ill elucidate the easy way to identify which items for what activities

Income statement items fall under operating activities.

Long term assets classify for investing activities

Short term assets classify for Operating activities

Equity items can be classified into Financing activities

Current liabilities classify into Operating activities

Non current liabilities classify into Financing activities.

Now that we know what it is, let's go ahead into calculating a cash flow statement

Reconcile PBT with cash flows from Operating, Investing and Financing.

Add depreciation and non cash charges.

Subtract all the cash outflows and add back all inflows. Similarly add or subtract value increases from inventory, receivables and payables. Finally once you know the cash available currently, add the opening balance and that gives you cash and equivalents at end of the period.

Linkage between balace sheet, income statement and cash flow statement

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