CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling
In a three-statement model, projected net income is added to retained earnings, and the cash flow statement is built from changes in balance sheet accounts. The main purpose of this linkage is most likely to:
The linkage most likely ensures the forecasts are internally consistent, so that the balance sheet balances and ending cash reconciles with the cash flow statement. Linking does not remove the need for revenue forecasts or eliminate uncertainty about future results.
- Aensure forecasts are internally consistent so the balance sheet balancesCorrect
- Bremove the need to forecast revenue
- Celiminate uncertainty about future cash flows
Explanation
Linking the statements means a change in one statement flows through the others, so assets equal liabilities plus equity and cash reconciles. It does not remove the need to forecast revenue or remove forecast uncertainty.
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