How to answer linking statements in an interview setting:

In real life, this process gets complicated because of many exceptions and unusual items on the statements. Luckily for you, interviews are not real life and those scenarios are unlikely to come up – so we can create a step-by-step process for linking the statements: 1
1. First, Net Income from the bottom of the Income Statement becomes the top line of the Cash Flow Statement.

2. Second, you add back non-cash expenses from the Income Statement (and flip the signs of items such as Gains and Losses).

3. Third, you reflect changes in operational Balance Sheet line items – if an Asset goes up, cash flow goes down and vice versa; if a Liability goes up, cash flow goes up and vice versa.

4. Fourth, you reflect Purchases and Sales of Investments and PP&E in Cash Flow from Investing.

5. Fifth, you reflect Dividends, Debt issued or repurchased, and Shares issued or repurchased in Cash Flow from Financing.

6. Sixth, you calculate the net change in cash at the bottom of the CFS, and then link this into cash at the top of the next period’s Balance Sheet.

7. Seventh, you update the Balance Sheet to reflect changes in Cash, Debt, Equity, Investments, PP&E, and anything else that came from the Cash Flow Statement.

A few more rules to keep in mind as you link the statements: 1 2 1. Reflect each Balance Sheet item once and only once on the Cash Flow Statement, and vice versa.

1 2. If an Asset goes up, cash flow goes down; if a Liability goes up, cash flow goes up, and vice versa. 2 3. The Balance Sheet must always balance (Assets must always equal Liabilities + Equity), no matter what else happens.

Those 3 rules above are universal and there are no exceptions. If you remember them and what goes in each section of the Cash Flow Statement, you’ll be in