Three Statement

Three-statement integrity

The three statements are one system, not three reports. Every figure on the cash flow statement is derived from a change on the balance sheet or a line on the income statement. When they stop articulating, the break is always locatable — this skill is the search order.

Load tie-out first. Every check below emits a PASS/FAIL with a stated threshold.

The four structural checks

Run these in order. Do not proceed past a FAIL — a downstream check on broken inputs produces misleading results.

1. The balance check

Assets = Liabilities + Equity        (both periods, exactly)

Threshold: exact. Not "within rounding." If your system carries cents, it balances to the cent. An out-of-balance balance sheet is never a materiality question.

2. Retained earnings roll-forward

Opening RE + Net income - Dividends/distributions +/- Prior-period adjustments = Closing RE

The Net income in this roll must equal the bottom line of the income statement for the same period. This single check catches most statement-linkage errors, because it is where the income statement physically connects to the balance sheet.

If it fails, the usual causes are: an equity entry booked directly to RE without flowing through the P&L, an OCI item misclassified into RE, or a period-boundary mismatch.

3. Cash flow ties to the balance sheet

Net change in cash (per CF statement) = Closing cash (BS) - Opening cash (BS)

Threshold: exact. Include restricted cash and cash equivalents consistently on both sides — a mismatch here is very often a definitional inconsistency rather than an arithmetic error.

4. Indirect cash flow reconstructs from BS deltas

Every line in the operating and investing sections traces to a balance-sheet movement:

Cash from operations
  Net income                              <- IS bottom line (same figure as check 2)
  + Depreciation & amortization           <- accumulated D&A delta (+ disposals)
  + Stock-based compensation              <- APIC delta attributable to SBC
  +/- Deferred taxes                      <- deferred tax asset/liability delta
  - Increase in AR                        <- -(closing AR - opening AR), gross of bad debt
  - Increase in prepaid                   <- -(closing - opening)
  + Increase in AP                        <- +(closing - opening)
  + Increase in accrued liabilities       <- +(closing - opening)
  + Increase in deferred revenue          <- +(closing - opening)  <-- the SaaS one

Working-capital sign convention, which is where people slip: an asset increase is a cash outflow; a liability increase is a cash inflow. Deferred revenue rising is cash in — for a SaaS company this is often the largest single operating cash item and the reason a business can be loss-making and cash-generative simultaneously.

The standard breakpoints

When statements do not articulate, check these in this order. This ordering reflects frequency.

On plugs: a plug is not a fix, it is a concealment. If a model contains a balancing plug, the correct action is to locate the real break and remove the plug — and to note in the review that results produced while the plug existed are unreliable.

Reviewing a three-statement model

Beyond the arithmetic, check the construction:

• One input cell per assumption. An assumption entered in two places will disagree.
• No hardcodes inside formula rows. A typed constant in a calculated row is the single most common model defect — see model-audit for the mechanical detection.
• Consistent formulas across a row. A row where column K differs structurally from J is almost always an error, not an intentional exception.
• Sign conventions declared and consistent. Expenses positive-and-subtracted, or negative-and-added — pick one, state it, never mix within a statement.
• Historicals locked. Actuals should not be formula-driven off assumptions.
• Circularity handled explicitly. Either broken by design or controlled with a documented iterative switch and a convergence check. Never left implicit.
• The balance check is visible on the sheet, not buried. If a model does not show its own balance check, add one before doing anything else with it.

SaaS-specific statement notes

• Deferred revenue is the pivot. It links billings (cash) to revenue (ASC 606). Reconciling it is simultaneously a balance-sheet control and the bridge between dashboard ARR and GL revenue — see saas-metrics and the deferred-revenue section of reconciliation.
• Capitalized commissions (ASC 340-40) sit as a contract asset amortized over the expected benefit period. They depress cash relative to P&L in a growth period; the amortization is a non-cash add-back.
• Capitalized software moves engineering cost from opex to an intangible with its own amortization. It flatters EBITDA. When reporting a Rule of 40 or a burn multiple, state whether capitalization is included — it materially changes the answer, and comparability with benchmarks depends on it.
• SBC is the largest non-cash item at most venture-backed SaaS companies. Every EBITDA-style metric must state whether it is before or after SBC.

Multi-entity and FX translation (ASC 830)

The moment a foreign subsidiary appears, the single-entity checks above are necessary but no longer sufficient. The procedure, in order:

1. Determine each entity's functional currency first — the currency of the primary economic environment (where it prices, pays, and holds cash), not the currency it happens to report in. This decision picks the method for everything below, and changing it later is a restatement, not a toggle.
2. Pick the method the determination dictates:
   • Functional currency = local currency → current-rate translation: assets and liabilities at the period-end rate, income statement at the average rate (or transaction-date rates), equity at historical rates. The plug lands in CTA, inside OCI/equity — never in net income.
   • Functional currency = the parent's currency → remeasurement: monetary items at the period-end rate, non-monetary items at historical rates, and the gain/loss runs through the income statement. Translating a subsidiary the wrong way silently moves FX out of (or into) earnings.
3. Roll the CTA forward like any other equity account: opening CTA + current-period translation adjustment = closing CTA, and the movement must reconcile to the rate changes applied — a CTA that moved with no rate story is a plug hiding an error. This is the account the Output block's OCI line exists for; "single-entity, no foreign subsidiaries this period" is the honest note when it is empty, not a default to leave unexamined.
4. Eliminate intercompany before consolidating, in one currency. Intercompany balances must net to zero after both sides are translated — a payable booked at one month's rate against a receivable at another's leaves a phantom difference that belongs in CTA (or FX gain/loss under remeasurement), not in a consolidated asset. The matching mechanics live in reconciliation's intercompany rules; this check is where they meet the statements.
5. Rates are inputs, pinned as-of — loaded at Phase 0 with the trial balances, with the source and date stated, per the as-of principle. A rate fetched live mid-close is unauditable; a rate loaded with the extract ties out forever.

Scope note: this is the close-mechanics layer — enough to translate, roll CTA, and prove the eliminations. Full consolidation systems (ownership ladders, minority interest, hyperinflationary economies under ASC 830-10) are out of this pack's scope, per the README boundary.

Output

STATEMENT INTEGRITY | period 2026-07 | as-of 2026-08-19T14:20Z

1. Balance check          A 48,220,115.02 = L+E 48,220,115.02        PASS (exact)
2. RE roll-forward        11,204,880 + (1,412,004) - 0 = 9,792,876   PASS
   NI per roll (1,412,004) = IS net income (1,412,004)               PASS
3. CF ties to BS cash     net change (884,120) = 6,110,447-6,994,567 PASS (exact)
4. Indirect CF rebuild    all 9 lines trace to BS deltas             PASS
                          largest: deferred revenue +1,209,880

NOT CHECKED
  - OCI/CTA detail: single-entity, no foreign subsidiaries this period
  - Segment statements: not prepared

RESULT  PASS

Degraded mode

Every check here is arithmetic on figures you can read off the statements. No tooling required. With a spreadsheet available, build the four checks as visible formulas on the sheet so they re-run themselves — a check that lives only in a chat transcript does not protect next month's close.

Related skills

• tie-out — the output format
• reconciliation — the account-level proofs feeding the statements
• model-audit — mechanical detection of the construction defects listed above
• saas-metrics — where statement figures meet operating metrics
• flux-analysis — explaining the movements once the statements foot