three-statement

name	three-statement
description	Three-statement financial analysis — P&L, Balance Sheet, Cash Flow linkages, common-size analysis, cross-statement validation, DuPont decomposition.
tags	["finance","three-statement","pnl","balance-sheet","cash-flow","dupont","common-size","horizontal-analysis"]

Three-Statement Financial Analysis Skill

When to Use This Skill

Use this skill when the user asks for:

• Analysis linking income statement, balance sheet, and cash flow statement
• Common-size (vertical) analysis — each line as % of revenue or total assets
• Horizontal analysis — period-over-period changes, trend indexing, CAGR
• Cross-statement validation or consistency checks
• DuPont decomposition of ROE
• Building or auditing a three-statement model

1. Statement Linkages

Income Statement -> Cash Flow Statement (Indirect Method)

Operating Cash Flow =
    Net Income
  + Depreciation & Amortization
  + Stock-Based Compensation
  + Impairment Charges / Write-downs
  + Deferred Tax Expense
  - Gains on Asset Sales
  + Losses on Asset Sales
  - Increase in Accounts Receivable
  + Decrease in Accounts Receivable
  - Increase in Inventory
  + Decrease in Inventory
  + Increase in Accounts Payable
  - Decrease in Accounts Payable
  +/- Other working capital changes

Working capital sign rule:

• Increase in current ASSET -> SUBTRACT (uses cash)
• Decrease in current ASSET -> ADD (frees cash)
• Increase in current LIABILITY -> ADD (source of cash)
• Decrease in current LIABILITY -> SUBTRACT (uses cash)

Cash Flow Statement -> Balance Sheet

BS Cash (end) = BS Cash (begin) + CFO + CFI + CFF

Income Statement -> Balance Sheet

Retained Earnings (end) = Retained Earnings (begin) + Net Income - Dividends

Key Cross-Statement Linkages

Source	Line Item	Target	Line Item
IS	Depreciation Expense	BS	Accumulated depreciation increases
IS	Depreciation Expense	CFS	Added back in CFO
CFS	CapEx (Investing)	BS	PP&E increases
CFS	Debt Issuance	BS	Long-term debt increases
CFS	Share Buyback	BS	Treasury stock increases
CFS	Dividends Paid	BS	Retained earnings decreases

Critical insight: The CFS is a reconciliation of YoY changes in every Balance Sheet line. If you take every non-cash BS account's change and classify it into Operating/Investing/Financing, the sum must equal the change in cash.

2. Common-Size Analysis (Vertical)

Income Statement: % of Revenue

WITH revenue AS (
    SELECT period, SUM(CASE WHEN line_item = 'Revenue' THEN amount END) AS rev
    FROM s_income_statement GROUP BY period
)
SELECT f.period, f.line_item, f.amount,
    ROUND(f.amount / NULLIF(r.rev, 0) * 100, 2) AS pct_of_revenue
FROM s_income_statement f
JOIN revenue r ON f.period = r.period
ORDER BY f.period, f.line_item;

Balance Sheet: % of Total Assets

WITH totals AS (
    SELECT period, SUM(CASE WHEN line_item = 'Total Assets' THEN amount END) AS ta
    FROM s_balance_sheet GROUP BY period
)
SELECT f.period, f.line_item, f.amount,
    ROUND(f.amount / NULLIF(t.ta, 0) * 100, 2) AS pct_of_total_assets
FROM s_balance_sheet f
JOIN totals t ON f.period = t.period
ORDER BY f.period, f.line_item;

3. Horizontal Analysis (Period-over-Period)

SELECT
    line_item, period, amount,
    LAG(amount) OVER (PARTITION BY line_item ORDER BY period) AS prior_amount,
    amount - LAG(amount) OVER (PARTITION BY line_item ORDER BY period) AS abs_change,
    CASE WHEN LAG(amount) OVER (PARTITION BY line_item ORDER BY period) = 0 THEN NULL
         ELSE ROUND((amount - LAG(amount) OVER (PARTITION BY line_item ORDER BY period))
              / ABS(LAG(amount) OVER (PARTITION BY line_item ORDER BY period)) * 100, 2)
    END AS pct_change
FROM s_income_statement
ORDER BY line_item, period;

CAGR

CAGR = (Ending Value / Beginning Value)^(1/n) - 1

4. Cross-Statement Validation Checks

Run these on any uploaded financial data to verify consistency:

#	Check	Tolerance
1	Total Assets = Total Liabilities + Total Equity	Exact
2	RE_end = RE_begin + Net Income - Dividends	Exact
3	BS Cash_end = BS Cash_begin + CFO + CFI + CFF	Exact
4	PP&E_end = PP&E_begin + CapEx - Depreciation - Disposals	Rounding
5	Debt_end = Debt_begin + New Issuances - Repayments	Rounding
6	NI positive but OCF negative -> earnings quality flag	Soft
7	Revenue growth > 30% YoY with no asset growth -> recognition flag	Soft
8	Depreciation > CapEx for 3+ periods -> under-investment flag	Soft

-- Balance sheet balance check
SELECT period,
    MAX(CASE WHEN line_item = 'Total Assets' THEN amount END) AS total_assets,
    MAX(CASE WHEN line_item = 'Total Liabilities' THEN amount END)
    + MAX(CASE WHEN line_item = 'Total Equity' THEN amount END) AS liab_plus_equity,
    MAX(CASE WHEN line_item = 'Total Assets' THEN amount END)
    - (MAX(CASE WHEN line_item = 'Total Liabilities' THEN amount END)
       + MAX(CASE WHEN line_item = 'Total Equity' THEN amount END)) AS imbalance
FROM s_balance_sheet
GROUP BY period
HAVING ABS(imbalance) > 0.01;

5. DuPont Decomposition

3-Factor

ROE = (Net Income / Revenue) x (Revenue / Avg Total Assets) x (Avg Total Assets / Avg Equity)
    = Net Margin x Asset Turnover x Equity Multiplier

5-Factor

ROE = (NI/EBT) x (EBT/EBIT) x (EBIT/Revenue) x (Revenue/Avg Assets) x (Avg Assets/Avg Equity)
    = Tax Burden x Interest Burden x EBIT Margin x Asset Turnover x Equity Multiplier

Factor	Improving Means	Risk If Too High
Tax Burden (NI/EBT)	Lower effective tax rate	Unsustainable tax strategies
Interest Burden (EBT/EBIT)	Lower interest costs	Already at limit, rate risk
EBIT Margin	Better cost control / pricing power	Margin compression
Asset Turnover	More revenue per $ of assets	Asset quality deterioration
Equity Multiplier	Leverage amplifying returns	Insolvency risk

6. Analytical Workflow

1. Identify which statements are present (IS, BS, CFS, or partial)
2. Normalize line item names, sign conventions, periods
3. Validate cross-statement checks (balance check, RE roll-forward, cash reconciliation)
4. Compute vertical analysis (common-size) for each statement
5. Compute horizontal analysis (YoY, QoQ, CAGR) for all line items
6. Compute DuPont decomposition (3-factor minimum, 5-factor if data allows)
7. Flag edge cases (negative equity, zero denominators, missing data)
8. Interpret which DuPont factor drives ROE changes; which margins expand/contract

Common Pitfalls

• Division by zero: Always use NULLIF(denominator, 0) — never produce infinity
• Negative equity: ROE meaningless when equity < 0 (buyback-heavy companies). Use ROIC instead
• Snapshot vs flow mismatch: Use average BS values for ratios like ROE and asset turnover
• GAAP vs Non-GAAP: Never mix GAAP numerator with non-GAAP denominator
• Fiscal year mismatch: Note FY end dates when comparing across companies
• Quarterly TTM: Sum trailing 4 quarters for IS items; BS ratios are point-in-time
• Non-recurring items: If NI deviates sharply from operating income, flag non-operating items