Technical / Accounting
3-Statements: What You Need to Know for IB Interviews
Simple guide to the most essential documents in finance.
"Accounting is the language of business." — Warren Buffett
Core Purpose
Understanding the three financial statements means developing a mental model of how business economics flow through accounting. IB interviews test your ability to trace changes through statements intuitively.
Golden rule: Start at the top of the Income Statement (IS), work down. Move to the Cash Flow Statement (CFS), then the Balance Sheet (BS). Visualize: Balance Sheet (left), Income Statement (middle), Cash Flow Statement (right). This mental map provides a consistent checklist for any question.
Statement Architecture
Statement Linkages
Critical connections to memorize:
- Net Income (IS) → Starting point of Cash Flow Statement
- Net Change in Cash (CFS) → Cash on Balance Sheet
- Net Income (IS) → Retained Earnings on Balance Sheet
Unified Flow Concept
Think of the Income Statement and Cash Flow Statement as one continuous statement:
Part 1 (Income Statement): Measures profitability on an accrual basis—where value was delivered and lost this period.
Adjusts accrual profitability to show actual cash—what came in and out of the wallet this period.
Income Statement Mechanics
The Income Statement answers: "What value did we recognize this period?"
Key Line Items
Cash Flow Statement Mechanics
The Cash Flow Statement answers: "What actually happened to our cash this period?"
Classification Logic
- If cash actually changed hands → appears directly in the appropriate CFS section
- If it shows on the Income Statement but cash didn't move → adjust for it in CFO
Cash from Operations (CFO)
Start with Net Income, then make two adjustment types:
Non-cash charges (add back):
- Depreciation & Amortization
- Stock-based compensation
- Deferred taxes
- Impairment charges
Working Capital changes:
- AR increase → cash outflow (sales made, not collected)
Balance Sheet Mechanics
The Balance Sheet answers: "What do we own, what do we owe, and what's left for shareholders at this moment?"
Organization: Liquidity Ordering
Each section ordered from most liquid/current to least.
Current Assets:
- Cash
- Accounts Receivable
- Inventory
- Prepaid Expenses
Complete Walkthrough Example
Inventory Purchase
"The company spends $1,000 on inventory. Walk me through the three statements."
Assume cash purchase.
Step 1: Classification
Buying inventory is a cash transaction that doesn't immediately impact the IS (not sold yet). Start with CFS.
Step 2: Cash Flow Statement
- CFO: Inventory increase → Working Capital outflow → CFO −$1,000
- Net Change in Cash: −$1,000