How do the three financial statements interconnect?

The correct answer highlights the critical interplay between the three financial statements: the Income Statement, the Cash Flow Statement, and the Balance Sheet.

Net income is calculated on the Income Statement and serves as a key component that flows into the Cash Flow Statement, specifically in the operating activities section. This reflects how net income affects an entity’s cash position through operational performance. Furthermore, net income from the Income Statement also contributes to the Retained Earnings line in the equity section of the Balance Sheet. Retained Earnings is adjusted by the net income earned during the period, which shows how the company is reinvesting its profits or distributing them as dividends.

Therefore, option B accurately represents the interconnected nature of these financial statements by illustrating not only the direct flow of net income but also how it influences the cash generated from operations and impacts equity through retained earnings. This connectivity is vital, as it helps stakeholders understand how income translates into cash and its ultimate effect on the company's financial position.