How do the three financial statements link together?

The integration of the three financial statements—income statement, balance sheet, and cash flow statement—is fundamental to understanding a company's financial health and performance.

Starting with the first point, cash flows indeed lead to retained earnings as the net income from the income statement affects retained earnings within the equity section of the balance sheet. This connection demonstrates how profits are retained in the business rather than distributed as dividends.

Next, the income statement does indeed lead to the cash flows statement and the balance sheet. The income statement provides net income, which serves as the starting point for the cash flows from operating activities on the cash flow statement. Additionally, net income affects the equity section of the balance sheet through its impact on retained earnings.

Lastly, the net income from the income statement flows into operating cash flows primarily on the cash flow statement. This is a critical link because it shows how much cash was generated from operations during a specific period, highlighting differences between accounting profits and actual cash generated.

Therefore, the choice that states all of these connections highlights the comprehensive way in which the financial statements interact, illustrating the flow of information between them and forming a cohesive picture of the company's financial situation.