Explain the three-statement model.
A core FP&A interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The Income Statement, Balance Sheet, and Cash Flow Statement linked dynamically. Net income flows from IS to retained earnings (BS) and is the starting point of the CF statement. The CF statement reconciles to the cash line on the BS. Working capital changes link IS revenue/costs to BS receivables/payables. The model balances only when all three tie out — debt schedules and PP&E roll-forwards complete the links.
WHAT INTERVIEWERS LISTEN FOR
- ✓Net income links statements
- ✓Cash flow reconciles to cash
- ✓Working capital changes link
- ✓Model balances when tied out
- ✓Debt and PP&E roll-forwards
COMMON MISTAKES
- ✗Forgets retained earnings link
- ✗Ignores working capital adjustments
- ✗Thinks statements are independent
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