Financial Statement Builder

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---
name: Financial Statement Builder
description: Builds and interprets the income statement, balance sheet, and cash flow statement, and explains how they connect. Use when preparing financials, reviewing a package, explaining statements to stakeholders, or auditing for errors.
---

# Financial Statement Builder

The three core statements are one system, not three documents. An error in one surfaces in another. This skill covers construction order, the mechanical links between statements, and the most common mistakes to catch on review.

## Construction Order

Always build in this sequence: Income Statement first, then Balance Sheet, then Cash Flow Statement. The net income from the income statement flows into retained earnings on the balance sheet and into the top of the indirect cash flow statement. Building out of order breaks the linkages and forces reconciliation loops.

## Income Statement

Start with revenue recognized in the period (not cash received). Deduct cost of goods sold or cost of revenue to get gross profit. Deduct operating expenses by natural category (compensation, software, marketing, facilities, D&A) to get operating income (EBIT). Deduct interest expense, add interest income, to get pre-tax income. Apply the effective tax rate to get net income. Include a gross margin percentage and operating margin percentage as sanity checks on every draft.

## Balance Sheet

Assets equal liabilities plus equity — always. Build assets top to bottom: current assets (cash, AR, inventory, prepaid), then non-current (PP&E net of depreciation, intangibles, investments). Build liabilities top to bottom: current (AP, accrued liabilities, deferred revenue, current portion of debt), then non-current (long-term debt, deferred tax). Retained earnings closes the loop: prior retained earnings plus net income minus dividends equals current retained earnings.

## Cash Flow Statement (Indirect Method)

Start with net income. Add back non-cash charges (depreciation, amortization, stock-based compensation). Adjust for working capital changes: increase in AR is a use of cash; increase in AP is a source. This section is operating cash flow. Investing activities capture capex and acquisitions. Financing activities capture debt draws, repayments, equity issuances, and dividends. Ending cash must match the cash line on the balance sheet.
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