Wednesday, November 19, 2008

How do the Financial Statements Flow Together?

Understanding how the three core financial statements interplay is fundamental to your success in investment banking interviews. Below is a brief description of the three statements and how they connect to one another. Following the explanation you will find a few sample interview questions.

Income Statement
Net income--the bottom line--flows from the Income Statement to Retained Earnings on the Balance Sheet. It also becomes the first line of Cash from Operations on the Cash Flow Statement. You can think of the Income Statement as a cumulative record over a period of time.

Balance Sheet
The name of this statement describes its purpose; the Balance Sheet always balances. This financial statement acts as a record for a firm's assets and all the claims against those assets. The remaining value is called Stockholder's Equity. The Cash balance which is the first line item under Current Assets at the top of the Balance Sheet is taken from the Ending Cash on the Cash Flow Statement. The Balance Sheet, unlike the Income Statement, is not a cumulative record over time; it is a snapshot of one moment in time.

Cash Flow Statement
The Cash Flow Statement connects the three financial statements together. The statement begins with Net Income from the Income Statement and the Ending Cash balance at the bottom Cash Flow Statement flows to Cash and Cash Equivalents at the top of the Balance Sheet.

Practice Interview Questions:

Which financial statement is most important?

The answer to this question depends on who is asking but generally the Cash Flow Statement is most crucial. An analyst in Lev Fin (Leveraged Finance) at a bulge bracket in New York explained to me that the Cash Flow Statement defines a firm's financing options. Whether it be a leveraged buyout, dividend distribution, or a restructuring, the Cash Flow Statement tells financiers what their options are. Cash is King!
If you could only have two of the three core financial statements, which two would you take?

Even though the Cash Flow Statement ties the three statements together, the most important items from the Cash Flow Statement can be derived from the Income Statement and the Balance Sheet. I would take the Income Statement and the Balance Sheet.
How do the three financial statements flow together?

For this question you should restate the descriptions mentioned above in an abbreviated fashion. Practice this several times out loud and while mock interviewing.


Jonathyk said...

Thanks for all your posts. I just got a job offer despite whats happening right now. All your posts helped me in my interviews. Once again, thanks.

Anonymous said...


I read this post two times.

I like it so much, please try to keep posting.

Let me introduce other material that may be good for our community.

Source: Sample interview questions

Best regards

Boutique Investment Banks said...


A financial services company offering broker-dealer, investment banking, investment advisory and wealth management services, announced that is has purchased an additional 12.2% equity interest. Thanks a lot.

Carlos said...


I like this post:

You create good material for community.

Please keep posting.

Let me introduce other material that may be good for net community.

Source: Financial analyst interview questions

Best rgs


Financial statements can be hard to understand.

Anonymous said...

Found this video really helpful -

Anonymous said...

Tks very much for your post.

Avoid surprises — interviews need preparation. Some questions come up time and time again — usually about you, your experience and the job itself. We've gathered together the most common questions so you can get your preparation off to a flying start.

You also find all interview questions at link at the end of this post.

Source: Download Ebook: Investment Club Accounting has never been easier. Discover a step-by-step process to running the accounts for your investment club:

Source: Download Ebook: Ultimate Guide To Job Interview Questions Answers:

Best rgs

flipindia said...

Flip India offers the Best certification in banking and finance Courses enabling students and working professionals enhance their professional courses in finance.