How the three statements link
Net income from the income statement is the first line of the cash flow statement and flows into retained earnings on the balance sheet.
The cash flow statement then adjusts net income for non-cash items (add back depreciation), changes in working capital, capex, and financing. Its bottom line, the change in cash, updates cash on the balance sheet.
That's why the balance sheet balances: every change on it is explained by the other two statements.
Worked example
Trace net income through the statements. Tap the path in order.
- Net income (income statement)
- Top of the cash flow statement
- Adjust for non-cash items, working capital, capex, financing
- Change in cash updates the balance sheet
Net income starts the cash flow statement; the adjustments turn it into the change in cash, which lands on the balance sheet (and net income also adds to retained earnings).
Quick check
Where does net income go after the income statement?
To the top of the cash flow statement and into retained earnings. Net income starts the cash flow statement and adds to retained earnings in equity.