Walk me through the three statements
4 min read · updated June 29, 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.
Let's 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.
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.
How they link
Three connections do almost all the work:
- Net income is the top line of the cash flow statement (cash from operations) and it flows into retained earnings on the balance sheet.
- Non-cash charges — depreciation, amortization, stock comp — get added back on the cash flow statement, because they reduced net income but no cash left the building.
- The cash flow statement's ending cash becomes the cash line on the balance sheet, and the balance sheet balances.
The test: "Depreciation goes up by $10"
This is the classic. An interviewer raises depreciation by $10 and asks you to walk all three statements. Use a 40% tax rate and clean round numbers — there's no calculator in the room.
Income statement. Depreciation is an expense, so pre-tax income drops by $10. At a 40% tax rate you save $4 in taxes, so net income falls by $6.
Cash flow statement. Start at net income, down $6. But depreciation is non-cash, so you add back the full $10. Net effect: cash from operations is up $4 — exactly the tax saving. Cash at the bottom rises $4.
Balance sheet. On the assets side: cash +$4, and PP&E −$10 (you depreciated it), so assets are −$6 net. On the other side: net income fell $6, so retained earnings −$6. Both sides move by $6. It balances.
The two ways people blow this: (1) they forget to add the full $10 of depreciation back on the cash flow statement, and (2) they forget the tax shield — depreciation's only real cash effect is the taxes it saves. Say the tax rate out loud and the numbers fall out: net income −$6, cash +$4, balance sheet down $6 on each side.
Why interviewers love it
It's the perfect filter. In ninety seconds it reveals whether you memorized definitions or actually understand the plumbing — which is the literal job of a first-year analyst building models.
Always walk them in the same order: income statement → cash flow statement → balance sheet, and finish by stating that the balance sheet balances. Practice it out loud until it's a 60-second reflex. That fluency — not the arithmetic — is what separates a confident answer from a shaky one in a Superday.
Make it stick
Test yourself on this