What are some good ways to not miss a line item on BS/CFS when doing three statement model build?

To avoid missing line items on the Balance Sheet (BS) and Cash Flow Statement (CFS) when building a three-statement model, here are some effective strategies based on the most helpful WSO content:

1. Follow a Logical Flow: IS → CFS → BS

   • Start with the Income Statement (IS) to calculate Net Income.
   • Use Net Income as the starting point for the CFS, adjusting for non-cash items (e.g., depreciation, amortization) and changes in working capital.
   • Finally, link the CFS to the BS by ensuring that changes in cash flow are reflected in the cash balance on the BS.

2. Line-by-Line Approach for CFS

   • Create the CFS by systematically linking it to changes in BS accounts year-over-year.
   • For assets, calculate changes as beginning balance - ending balance.
   • For liabilities, calculate changes as ending balance - beginning balance.
   • Ensure every BS account (except cash) has a corresponding line on the CFS.

3. Bundle Rogue Items

   • For unusual or less common items (e.g., "benefit plan contributions in excess of expense" or "loss on sale of assets"), bundle them into an "Other" category.
   • Keep these bundled items constant or set them to zero if you lack sufficient information to model them accurately.

4. State Assumptions Clearly

   • For items like depreciation, interest, or tax rates, state your assumptions explicitly (e.g., "straight-line depreciation over 10 years with no salvage value").
   • This ensures clarity and consistency throughout the model.

5. Balance Sheet Balancing Check

   • Always confirm that the BS balances when you're done. Say it out loud as you verify your math to ensure no line items are missed.

6. Practice and Simplify

   • Start with a simple three-statement model using a public company's 10-K as a reference.
   • Gradually add complexity, such as acquisitions or refinancing, to build confidence and familiarity with all line items.

7. Use Easy and Reasonable Numbers

   • When practicing, pick numbers that are straightforward but realistic (e.g., equipment worth $100, interest rate of 8%, tax rate of 30%). This reduces the chance of errors.

By following these steps, you'll systematically reduce the likelihood of missing any line items and ensure your model is accurate and complete. Good luck!

Sources: Modelling Gurus, please share your wisdom..., The Three Most Common Technicals, Modeling question: creating your own CFS, Investment Banking Interview Questions - 15 Answers to Land the Job