Walk me through the three financial statements and how they connect.
A core Restructuring interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The income statement shows revenue minus expenses to arrive at net income. Net income links the statements: it flows into retained earnings on the balance sheet, and it is the starting point of the cash flow statement. The cash flow statement reconciles net income to cash by adding back non-cash items (notably D&A), adjusting for changes in working capital, then deducting capex (investing) and reflecting debt and equity flows (financing); the ending cash figure ties back to cash on the balance sheet, which must balance (assets = liabilities + equity). A quick illustration of the linkage — a €10 rise in depreciation: on the P&L, EBIT falls €10 and, at a 30% tax rate, net income falls €7; on the balance sheet, PP&E falls €10 and retained earnings fall €7; on the cash flow statement, you start €7 lower but add back the €10 of D&A, for a net cash impact of +€3 (the tax shield). That €3 cash increase plus the €10 PP&E decrease reconciles the €7 fall in retained earnings, so everything balances.
WHAT INTERVIEWERS LISTEN FOR
- ✓IS: revenue − expenses = net income
- ✓Net income → retained earnings (B/S) and the start of the CF statement
- ✓CF: add back non-cash (D&A), adjust working capital, capex (investing), debt/equity (financing); ending cash ties to B/S
- ✓Linkage example: +€10 D&A → NI −€7, PP&E −€10, cash +€3 (tax shield) — balances
COMMON MISTAKES
- ✗Confusing net income with cash flow
- ✗Forgetting working-capital adjustments
- ✗Mixing up financing and investing activities
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