The three statements are one system. The income statement shows what the business earned, the balance sheet what it owns and owes on one date, and the cash flow statement how cash moved between two balance sheets. A linked model ties them so one change flows through all three:
- Net income starts the cash flow statement, and non-cash costs (D&A) are added back.
- Working capital changes come from the balance sheet: last year minus this year for assets, this year minus last year for liabilities.
- Capital spending, debt repayment and dividends come from their schedules, as negatives.
- The net change in cash updates the cash line: cash = last year's cash + net change in cash.
- The other balance sheet lines roll forward: PP&E + capex - D&A, debt - repayments, retained earnings + net income - dividends.
If every link is right, the balance sheet balances by itself. You never type a plug number to force it. A first build rarely balances on the first try; the next lesson is about finding why.