What is the recommended approach to answer a three statement question?

Starting with the income statement is the recommended approach for answering a three-statement question because the income statement provides critical insights into a company’s profitability over a specific period. This statement outlines revenues, expenses, and the net income, serving as the foundation for understanding subsequent financial metrics.

When you have the net income, you can then transition to the cash flow statement by using the net income as a starting point for calculating cash flows from operating activities. Moreover, the net income is also a key component in the equity section of the balance sheet, as it impacts retained earnings. Thus, beginning with the income statement not only provides a clear picture of operational performance but also aligns seamlessly with the cash flow statement and balance sheet in a cohesive manner.

In contrast, starting with the cash flow statement or the balance sheet could lead to a disjointed analysis since cash flows and balance sheet items reflect the outcomes of operations rather than the operations themselves. Reviewing the notes to the financial statements first might provide some additional context, but would not directly initiate a structured analysis of the three statements as effectively as beginning with the income statement.