At a glance · three statement model example
What this model does not cover: It excludes acquisitions, dividends, share issuance, deferred taxes, leases, currency effects, detailed debt schedules and accounting-policy choices. A balanced illustrative model can still contain a wrong assumption or classification. Real financial analysis requires source documents and review.
A three-statement financial model connects an income statement, cash-flow statement and balance sheet. The purpose is to make assumptions and their consequences visible: profit affects equity, non-cash depreciation is adjusted in operating cash flow, capital spending changes property and equipment, and financing activity changes debt and cash. The figures below are invented for learning and omit many real reporting complexities. They are not a forecast for an actual business.
Start with a clear assumption and source sheet
For fictional Cedar Components, assume Year 1 revenue of INR 100 lakh and Year 2 revenue of INR 110 lakh. The Year 2 cost of sales, operating expenses, depreciation, interest and tax are illustrative inputs. Keep each input separate from formulas so a reviewer can identify the assumption rather than mistake it for reported data. CFA Institute's financial modelling module emphasises a three-statement structure and an auditable separation of assumptions and calculations.
| Line | Year 1 | Year 2 | Year 2 calculation |
|---|---|---|---|
| Revenue | 100 | 110 | Assumed input |
| Cost of sales | 70 | 77 | Assumed input |
| Operating expenses | 15 | 16 | Assumed input |
| Depreciation | 5 | 6 | Assumed input |
| Operating profit | 10 | 11 | 110 - 77 - 16 - 6 |
| Interest | 2 | 2 | Assumed input |
| Tax | 2 | 2.25 | Illustrative input, not a stated tax rate |
| Net income | 6 | 6.75 | 11 - 2 - 2.25 |
Link profit to cash flow
Begin Year 2 with cash of INR 10 lakh. Add INR 6.75 lakh net income and INR 6 lakh depreciation, a non-cash expense in this simplified model. Receivables rise by INR 3 lakh and inventory by INR 2 lakh, so those increases use cash. Payables rise by INR 1 lakh, which releases cash in this simplified working-capital bridge. Subtract INR 8 lakh capital spending and INR 1 lakh debt repayment. Closing cash is 10 + 6.75 + 6 - 3 - 2 + 1 - 8 - 1 = INR 9.75 lakh.
| Cash-flow item | Effect on cash | Reason |
|---|---|---|
| Opening cash | 10.00 | Prior-period closing balance |
| Net income | +6.75 | Income statement link |
| Depreciation | +6.00 | Non-cash adjustment |
| Receivables increase | -3.00 | Working capital |
| Inventory increase | -2.00 | Working capital |
| Payables increase | +1.00 | Working capital |
| Capital spending | -8.00 | Investing cash flow |
| Debt repayment | -1.00 | Financing cash flow |
| Closing cash | 9.75 | Sum of the above effects |
Check the closing balance sheet
Year 1 assets are cash 10, receivables 12, inventory 8 and net property and equipment 40: total INR 70 lakh. Year 1 payables 10, debt 20 and equity 40 also total 70. In Year 2, receivables become 15, inventory 10, net property and equipment 42 (40 + 8 capex - 6 depreciation), debt 19 and payables 11. With no dividend or new equity in this illustration, equity becomes 46.75 (40 + 6.75 net income). Assets and liabilities plus equity both equal INR 76.75 lakh.
| Line | Year 1 | Year 2 |
|---|---|---|
| Cash | 10.00 | 9.75 |
| Receivables | 12.00 | 15.00 |
| Inventory | 8.00 | 10.00 |
| Net property and equipment | 40.00 | 42.00 |
| Total assets | 70.00 | 76.75 |
| Payables | 10.00 | 11.00 |
| Debt | 20.00 | 19.00 |
| Equity | 40.00 | 46.75 |
| Liabilities plus equity | 70.00 | 76.75 |
Model checks that catch common mistakes
- Recalculate operating profit and net income from the stated inputs.
- Trace every cash-flow adjustment to its balance-sheet movement and check the sign.
- Check that opening cash plus cash-flow movements equals closing cash.
- Roll property and equipment forward using capital spending and depreciation.
- Check that assets equal liabilities plus equity in each period; investigate any gap instead of inserting a balancing plug.
- Label assumptions, source periods, currency units and omitted items before sharing the model.
Why does depreciation increase cash flow here?
Depreciation reduced net income but did not itself use cash in the period, so the simplified indirect cash-flow bridge adds it back. Capital spending is shown separately as an investing cash outflow.
Does a balanced three-statement model prove the forecast is right?
No. Balance checks test some mechanical links. The assumptions, source quality, accounting choices and business reasoning still need independent review.
Use the model as a starting point for a fictional DCF
Compare the main share valuation methods
Build a separate weekly cash-flow forecast from expected receipts and payments
Read CFA Institute's financial modelling module outline
This is a fictional teaching model with intentionally simplified assumptions. It is not a live company forecast, a ready-to-use professional template or investment advice.