The 3-statement approach is a foundational financial modeling technique that integrates a company's Income Statement, Balance Sheet, and Cash Flow Statement into one dynamically linked Excel model. It forecasts a company's financial health, with changes in assumptions (e.g., revenue growth) automatically updating all three statements to ensure accuracy and consistency.
A three-statement financial model is an integrated model that forecasts an organization's income statements, balance sheets and cash flow statements. The three core elements (income statements, balance sheets and cash flow statements) require that you gather data ahead of performing any financial modeling.
At a high-level, the 3S Process consists of three stages (Story, Strategy, and Solution), which are described in detail in the article. Stage 1: Story in the process is inspired by the Harvard Case Method to provide context for a problem. Stage 2: Strategy uses Design Thinking to produce candidate solutions.
The income statement illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company's assets, liabilities, and shareholders' equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.
The 3-Statement Model is an integrated model used to forecast the income statement, balance sheet, and cash flow statement of a company for purposes of projecting its forward-looking financial performance.
How Do You Build a Three-Statement Model?
The three-statement model links a company's income statement, balance sheet, and cash flow projections together so you can project your future cash position and financial health. Let's break down each statement and explore how they connect to reveal the full story of a company's financial health.
The three main financial statements are the Income Statement (profitability over time), the Balance Sheet (assets, liabilities, equity at a point in time), and the Cash Flow Statement (cash movement from operations, investing, and financing activities), which together provide a comprehensive view of a company's financial health and performance.
Financial statements: The balance sheet, the income statement, and the statement of cash flows; where you find the actual financial results for the year. Notes to the financial statements: Details about potential problems with the numbers or how the numbers were derived.
GAAP stands for generally accepted accounting principles. GAAP is a set of rules for standardized financial reporting that help ensure accuracy and transparency. Organizations like publicly traded companies and government agencies must follow GAAP, which adapts to economic changes.
What is a 3-statement model template? A 3-statement model template is a tool that simplifies financial forecasting by combining your income statement, balance sheet, and cash flow statement into one dynamic file.
Net Income & Retained Earnings
Net income from the bottom of the income statement links to the balance sheet and cash flow statement. On the balance sheet, it feeds into retained earnings and on the cash flow statement, it is the starting point for the cash from operations section.
To answer these questions, we propose the 'circle of strategic decisions' model, which is a three-stage process that involves analysing, decision-making and implementation.
The basic building block of a DCF model is the 3 statement financial model, which links the financial statements together. This DCF model training guide will take you through the steps you need to know to build one yourself.
Both CFA and Financial Modeling are valuable — they're not competitors, but complements. If you want to build a complete finance career, learn both. Start with Financial Modeling to get practical exposure. Advance with CFA to gain global recognition and strategic understanding.
The three main financial statements are the Income Statement (profitability over time), the Balance Sheet (assets, liabilities, equity at a point in time), and the Cash Flow Statement (cash movement from operations, investing, and financing activities), which together provide a comprehensive view of a company's financial health and performance.
The three core financial statements are the Income Statement, the Balance Sheet, and the Cash Flow Statement, which together provide a complete picture of a company's financial health, profitability, and cash movement, linking together to show earnings, assets/liabilities, and actual cash flows over time.
The three primary types of accounts in the traditional accounting system are Personal, Real, and Nominal, each governed by specific debit/credit rules to record financial transactions accurately: Personal accounts deal with people/entities (Debit Receiver, Credit Giver), Real accounts cover assets/property (Debit What Comes In, Credit What Goes Out), and Nominal accounts relate to incomes/expenses (Debit Expenses/Losses, Credit Incomes/Gains).
On the top half you have the company's assets and on the bottom half its liabilities and Shareholders' Equity (or Net Worth). The assets and liabilities are typically listed in order of liquidity and separated between current and non-current. The income statement covers a period of time, such as a quarter or year.
Financial decision making has three main parts: investment, financing, and dividend decisions. Investment decisions are about finding and choosing the best opportunities for returns.
Financial modeling is the task of building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio of a business, project, or any other investment.
Sample Answer
“The three financial statements are the Income Statement, Cash Flow Statement and the Balance Sheet. The Income Statement tells us how much revenue the company generated and how much costs it incurred over a period of time. Starting with Revenue, we subtract Cost of Goods Sold to get Gross Profit.
The “strict time limit” could be anything from 30 minutes to 3-4 hours, and the complexity increases as the time limit increases. The “no strict time limit” type might give you several days or even 1 week+. There is still a deadline, but you don't need to rush around like a madman to finish.
The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out. These rules are the basis of double-entry accounting, first attributed to Luca Pacioli.