How do the three financial statements link together?

Three connections do the work. Net income is the top of the cash flow statement and flows into retained earnings on the balance sheet. Non-cash charges get added back on the cash flow statement. And the cash flow statement's ending cash becomes the balance sheet cash line, at which point the sheet balances.

Walk me through the three statements when depreciation goes up by 10.

Using a 40% tax rate: pre-tax income drops 10, you save 4 in taxes, so net income falls 6. On the cash flow statement, net income is down 6 but you add back the full 10, so cash rises 4. On the balance sheet, cash is up 4, PP&E down 10, retained earnings down 6, and it balances.

In what order should you walk the three statements?

Always the same order: income statement, then cash flow statement, then balance sheet, and finish by stating that the balance sheet balances. That fixed sequence is your safety rail when an interviewer changes one line and asks you to trace it. Practice it out loud until it is a 60-second reflex.

Accounting

Walk me through the three statements

By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching

7 min read · updated July 2, 2026

If you take one thing from this entire library, take this: the three statements are one connected system, not three separate reports. Nearly every technical question in a banking interview is, underneath, a test of whether you understand how a change in one statement ripples through the other two. Get this cold and most of accounting falls into place.

Start with what each statement actually answers, from the seat of the person running the company.

Income statement: did we make money this period? Revenue down to net income, on an accrual basis (you book the sale when you earn it, not when cash arrives).
Balance sheet: what do we own and owe right now? A snapshot at a point in time. Assets = Liabilities + Equity, always.
Cash flow statement: where did the cash actually go? It reconciles accrual net income back to the real movement of cash, because profit and cash are not the same thing.

Key insight

The income statement is built on accruals; the business runs on cash. The cash flow statement exists to bridge the two. That single idea is why this question gets asked. A profitable company can still run out of cash, and bankers get paid to see that coming.

The income statement, top to bottom

The income statement runs from sales at the top to profit at the bottom, peeling off a layer of cost at each step. The subtotals along the way each answer a different question.

Revenue less COGS is gross profit; less operating expenses is EBIT; less interest and taxes is net income.

Revenue: the top line, the total value of what you sold in the period.
Cost of goods sold: the direct cost of making those sales. Revenue minus COGS is gross profit, which tells you how much you keep per dollar of sales before overhead.
Operating expenses: overhead like SG&A, R&D, and depreciation. Gross profit minus these is operating income, or EBIT, the profit from the core business before financing and taxes.
Interest and taxes: subtract interest on debt and then taxes, and you reach net income, the bottom line that belongs to shareholders.

The key mental split: everything above EBIT is about the business; interest and taxes below it are about how the business is financed and taxed. That distinction drives half of valuation. Want the full line-by-line? See The income statement.

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Frequently asked

How do the three financial statements link together?: Three connections do the work. Net income is the top of the cash flow statement and flows into retained earnings on the balance sheet. Non-cash charges get added back on the cash flow statement. And the cash flow statement's ending cash becomes the balance sheet cash line, at which point the sheet balances.
Walk me through the three statements when depreciation goes up by 10.: Using a 40% tax rate: pre-tax income drops 10, you save 4 in taxes, so net income falls 6. On the cash flow statement, net income is down 6 but you add back the full 10, so cash rises 4. On the balance sheet, cash is up 4, PP&E down 10, retained earnings down 6, and it balances.
In what order should you walk the three statements?: Always the same order: income statement, then cash flow statement, then balance sheet, and finish by stating that the balance sheet balances. That fixed sequence is your safety rail when an interviewer changes one line and asks you to trace it. Practice it out loud until it is a 60-second reflex.