How the three statements connect: a worked example

Following up on my previous post of INCOME STATEMENT | CASH FLOW & BALANCE SHEET. - let me give you an example to illustrate the connection between the three financial statements.

Let's say we have a company named XYZ Inc. that sells computers. Here are the financial statements for XYZ Inc. for the year ended December 31, 2020:

Income Statement
- Revenue: $1,000,000
- Cost of goods sold: $500,000
- Gross profit: $500,000
- Operating expenses: $200,000
- Net income: $300,000

Balance Sheet
- Assets:
- Cash: $100,000
- Accounts receivable: $50,000
- Inventory: $200,000
- Property, plant, and equipment: $500,000
- Liabilities:
- Accounts payable: $50,000
- Short-term debt: $100,000
- Long-term debt: $200,000
- Equity:
- Retained earnings: $500,000
- Common stock: $100,000

Cash Flow Statement
- Cash flow from operating activities: $400,000
- Cash flow from investing activities: -$100,000
- Cash flow from financing activities: -$200,000
- Net increase in cash: $100,000
- Cash at beginning of year: $0
- Cash at end of year: $100,000

Now, let's see how these three statements are linked:

1. The net income of $300,000 from the income statement flows into the balance sheet as retained earnings of $500,000.

2. The cash balance of $100,000 on the balance sheet is the same as the ending cash balance of the cash flow statement.

3. The net income of $300,000 from the income statement is used to calculate the cash flow from operating activities on the cash flow statement.

So, we can see that the net income from the income statement is used to calculate the retained earnings on the balance sheet and the cash flow from operating activities on the cash flow statement. Additionally, the cash balance on the balance sheet is the same as the ending cash balance on the cash flow statement. This illustrates how the three financial statements are linked and provide a comprehensive view of XYZ Inc.'s financial health.