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A dynamic model links the three statements together.

The following graph illustrates the necessary links for the underlying dynamic business
model including a full balance sheet:

Balance Sheet

Income Statement
Sales (driver: growth)

Cash

- Cost of Goods Sold

Inventory

Accounts Receivable

- Operating Expenses (driver: margin, inflation)

PP&E

+ Synergies (if any)

Total Assets

Accounts Payable

Debt

Shareholders Equity

= Gross Profit (driver: margin)

= EBIT
- Interest
= EBT
- Tax

= Net Income

Total Liabilities and Shareholders Equity

Working Capital Schedule

Cash Flow Statement

Change in Inventory (driver: turns/sales)

Net Income

Change in Accounts Receivable (driver: days/sales)

+ Depreciation (1)

Change in Accounts Payable (driver: days/COGS)

= Operating Cash Flow

- Investment in WC

Investment in WC
Debt and Cash Schedule
Beginning Cash Balance

- Capital Expenditures

Beginning Debt Balance

= Free Cash Flow

+/- Change in Cash

+/-Change in Debt

+/- Debt paydown/increase

- Dividend Payments
+/-Change in Equity

Ending Debt Balance (calculate interest expense on average)

= Change in Cash

Ending Cash Balance (calculate interest income on average)

Note: (1) Depreciation of factory-related items can be found in Cost of Goods Sold. Depreciation on everything else (headquarters, copiers in
corporate offices) can be found in SG&A.

**