What is the cleanest way to link statements?

Start with net income, add non-cash items, then connect to cash and balance sheet changes.

How does depreciation affect cash flow?

It reduces EBIT and taxes, then is added back as a non-cash expense.

Three Financial Statements: Clean Linking Rules (2025)

Clear rules for linking the income statement, balance sheet, and cash flow, with a $10 depreciation walk-through and the pitfalls bankers test every time.

Linking rules you should know cold

Start with net income, adjust for non-cash items, and connect to cash and balance sheet changes. Interviewers want the logic, not memorization.

$10 depreciation walk-through (30% tax)

Statement	Impact
Income Statement	EBIT -10, EBT -10, Net Income -7
Cash Flow	Net Income -7, add back D&A +10, Net Cash +3
Balance Sheet	PP&E -10, Cash +3, Retained Earnings -7

Common pitfalls

Forgetting the tax shield from non-cash expenses.
Letting the balance sheet go out of balance.
Mixing cash flow timing with accrual timing.

Pair this with IB Technical Drill-Downs and the Working Capital Peg guide.