How the Three Statements Connect
A 3-statement model is a spreadsheet that forecasts a company's income statement, balance sheet, and cash flow statement together, so a change in one flows through to the others. It sounds advanced, but the core idea fits on one page. Most people get stuck because they learn the statements one at a time and never see the links.
In this course you will build a full model for one small, made-up company. Every number is provided, so you can check your work at each step. You will use AI to explain links, write formulas, and find mistakes. The spreadsheet does the math.
What You'll Learn
- What each of the three statements tells you
- The four links that tie the statements together
- Why a profitable company can still run low on cash
- How to get the sample dataset and set up your sheet
The three statements in one sentence each
- Income statement: did the company make a profit over the year?
- Balance sheet: what does the company own and owe on the last day of the year?
- Cash flow statement: where did the cash actually come from and go during the year?
The income statement and cash flow statement cover a period, like a full year. The balance sheet is a snapshot of a single day. That difference matters. It is why the cash flow statement exists: it explains how you got from last year's balance sheet to this year's.
The four links
You only need four links to make a model work.
- Income statementNet income is the bottom line
- Cash flow statementStarts from net income, adjusts for non-cash items
- Closing cashEnding cash becomes the cash line on the balance sheet
- Balance sheetNet income, minus dividends, adds to equity
- Net income starts the cash flow statement. You begin with profit, then adjust it to cash.
- Depreciation is added back. It reduces profit but no cash leaves the business, so the cash flow statement adds it back. It also lowers the value of equipment on the balance sheet.
- Changes in balance sheet items become cash flows. If customers owe you more money this year (receivables go up), that is profit you have not collected yet, so cash goes down.
- Closing cash goes to the balance sheet, and net income minus dividends goes to equity. These two links close the loop between the statements.
If you remember nothing else, remember this: assets must equal liabilities plus equity. Every model has a check row for this. A zero is the first sign your links are right.
Meet Brightcup Coffee Roasters
Brightcup is a small, made-up coffee roasting business. It buys green beans, roasts them, and sells bags to cafes and shops. All numbers are in thousands, and you can read them in any currency.
Here is its last full year, called Year 0.
| Income statement, Year 0 | Amount |
|---|---|
| Revenue | 1,000 |
| Cost of goods sold | 600 |
| Gross profit | 400 |
| Operating expenses | 250 |
| EBITDA | 150 |
| Depreciation | 50 |
| Operating profit (EBIT) | 100 |
| Interest | 12 |
| Profit before tax | 88 |
| Tax | 17.6 |
| Net income | 70.4 |
| Balance sheet, end of Year 0 | Amount |
|---|---|
| Cash | 100 |
| Accounts receivable | 100 |
| Inventory | 90 |
| PP&E (equipment, net) | 400 |
| Total assets | 690 |
| Accounts payable | 60 |
| Debt | 200 |
| Equity | 430 |
| Total liabilities and equity | 690 |
Assets of 690 equal liabilities plus equity of 690. That is a balanced starting point.
Year 0 figures are given actuals. You copy them from the template, you do not calculate them.
Get the template
Download the Brightcup template (CSV) and open it in Google Sheets or Excel. It has 55 rows in one sheet. If it opens as a single column, or the percentages show as text, your spreadsheet probably uses a comma for decimals. In Google Sheets, use File > Import and choose comma as the separator. In Excel, use Data > From Text/CSV and set the delimiter to comma. Then check that a cell like 60% shows as a number.
The layout:
- Rows 3 to 14: assumptions for Years 1 to 3
- Rows 17 to 27: income statement
- Rows 30 to 39: balance sheet
- Rows 42 to 55: cash flow statement
Column B is Year 0. Columns C, D, and E are Years 1, 2, and 3. Year 0 is already filled in. Your job over the next lessons is to fill columns C to E with formulas.
Keep this layout. The prompts in this course use these exact rows, so the formulas AI writes for you will drop straight in.
Use AI as a tutor first
Before you build anything, ask AI to explain the links using Brightcup's numbers. Explaining a concept with real numbers is one of the things AI does best.
Read the answer and check it against the four links above. If the explanation says receivables going up adds cash, it is wrong. That is a good early reminder: AI explains well, but you still check.
Why profit is not cash
Here is a preview of something you will see in your own model. In Year 1, Brightcup makes more profit than in Year 0. Yet its cash goes down, from 100 to 89.4.
How? It spends 60 on new equipment, pays back 50 of debt, pays 20 in dividends, and ties up more money in stock and unpaid customer bills. Profit is an opinion shaped by accounting rules. Cash is a fact. A 3-statement model shows you both, side by side.
Key Takeaways
- The income statement shows profit, the balance sheet shows what you own and owe on one day, and the cash flow statement explains the change in cash.
- Four links tie them together: net income starts the cash flow, depreciation is added back, balance sheet changes become cash flows, and closing cash plus retained profit return to the balance sheet.
- Assets must equal liabilities plus equity. A zero on the check row means your links are right.
- Download the Brightcup template and keep its row layout so AI-written formulas fit.
- Use AI to explain concepts with your numbers, and check its explanations against the rules.