"Something changes by $10. Walk me through the three statements." Investment banking interviewers ask this in a dozen versions, and every version is answered the same way: income statement first, then cash flow, then the balance sheet, then check that it balances. Below are 12 of the most asked changes, each worked through with the numbers, so you can see the pattern and then do them out loud.

All answers use a 25% tax rate and assume taxes are paid in cash in the same period. Say your tax rate at the start of your answer.

Who wrote this. We make Soreno, an AI interviewer for finance and consulting interviews. Every answer below was checked so that assets equal liabilities plus equity after the change.

The method, in four moves

Income statement. Does the change touch revenue or an expense? If yes, carry it down to pre-tax income, take tax off, and get the change in net income. If no, say "no change on the income statement" and move on.
Cash flow statement. Start with the change in net income. Add back anything non-cash. Adjust for working capital (an increase in an asset uses cash, an increase in a liability provides cash). Then investing and financing. Add it up to get the change in cash.
Balance sheet. Cash changes by the amount you just found. Then the item itself. Then retained earnings by the change in net income.
Check. Both sides must move by the same amount. Say "so it balances" only after you have checked.

All 12 at a glance

Change	Net income	Cash	What else moves on the balance sheet
1. Depreciation up $10	-7.50	+2.50	PP&E -10
2. Buy $10 of inventory with cash	0	-10	Inventory +10
3. Sell that inventory for $20	+7.50	+17.50	Inventory -10
4. $100 sale on credit	+75	-25	Receivables +100
5. Customer prepays $100	0	+100	Deferred revenue +100
6. $10 of wages accrued, not paid	-7.50	+2.50	Accrued liabilities +10
7. $10 of stock-based compensation	-7.50	+2.50	Paid-in capital +10
8. $100 write-down of an asset	-75	+25	PP&E -100
9. $100 of debt at 10%, one year later	-7.50	+92.50	Debt +100
10. Sell an asset on the books at $60 for $100	+30	+90	PP&E -60
11. Pay a $10 dividend	0	-10	Retained earnings -10
12. Buy back $50 of shares	0	-50	Treasury stock -50 (equity)

1. Depreciation goes up by $10

Income statement. Pre-tax income falls by $10. Tax falls by $2.50. Net income is down $7.50.

Cash flow. Net income is down $7.50. Depreciation is non-cash, so add back $10. Cash from operations is up $2.50, and so is cash.

Balance sheet. Cash is up $2.50 and PP&E is down $10, so assets are down $7.50. Retained earnings are down $7.50. It balances.

The point. Depreciation costs no cash but lowers the tax bill. We go through how a strong spoken answer sounds, draft by draft, in depreciation goes up by $10.

2. The company buys $10 of inventory with cash

Income statement. No change. Inventory is not an expense until it is sold.

Cash flow. Inventory is up $10, which uses cash. Cash from operations is down $10.

Balance sheet. Inventory up $10, cash down $10. Assets are unchanged, and nothing moves on the other side.

3. The company sells that inventory for $20

Income statement. Revenue is up $20 and cost of goods sold is up $10. Pre-tax income is up $10, tax is $2.50, net income is up $7.50.

Cash flow. Net income up $7.50, plus $10 because inventory fell. Cash from operations is up $17.50.

Balance sheet. Cash is up $17.50 and inventory is down $10, so assets are up $7.50. Retained earnings are up $7.50.

Follow-up. "What happened across both steps?" Cash went down $10 and then up $17.50, a net gain of $7.50, which equals the after-tax profit on the sale.

4. The company makes a $100 sale on credit

Assume a service with no cost of goods sold.

Income statement. Revenue is up $100. Tax is $25. Net income is up $75.

Cash flow. Net income is up $75, but receivables are up $100, which uses cash. Cash from operations is down $25. The company has paid tax on a sale it has not collected yet.

Balance sheet. Cash down $25, receivables up $100: assets up $75. Retained earnings up $75.

When the customer pays. No change on the income statement. Receivables fall by $100, cash from operations rises by $100. Cash is up $100 and receivables are down $100.

5. A customer prepays $100 for a year of service

At the time of payment. No change on the income statement, because nothing has been delivered. On the cash flow statement, deferred revenue is up $100, a liability going up, so cash from operations is up $100. On the balance sheet, cash is up $100 and deferred revenue is up $100.

After the service is delivered. Revenue is up $100, tax is $25, net income is up $75. On the cash flow statement, net income is up $75 and deferred revenue falls by $100, so cash from operations is down $25, which is the tax. On the balance sheet, cash is down $25 on the asset side. On the other side, deferred revenue is down $100 and retained earnings are up $75, a net fall of $25. It balances.

The point. Cash arrives before revenue. Subscription businesses can show strong cash flow while reported revenue lags.

6. $10 of wages are earned by employees but not yet paid

Income statement. Wage expense is up $10. Net income is down $7.50.

Cash flow. Net income is down $7.50. Accrued liabilities are up $10, which adds back $10. Cash from operations is up $2.50.

Balance sheet. Cash is up $2.50. Accrued liabilities are up $10 and retained earnings are down $7.50, a net rise of $2.50.

When the wages are paid. No change on the income statement. Accrued liabilities fall by $10 and cash falls by $10.

7. The company records $10 of stock-based compensation

Income statement. Expense is up $10. Net income is down $7.50.

Cash flow. Net income down $7.50, add back $10 of non-cash compensation. Cash from operations is up $2.50.

Balance sheet. Cash is up $2.50. In equity, paid-in capital is up $10 and retained earnings are down $7.50, a net rise of $2.50.

The point. It has the same shape as depreciation. The follow-up is usually "is it really free?" It is not: existing shareholders are diluted, which is why many investors subtract it when they value a company.

8. A $100 write-down of an asset

Income statement. A $100 impairment charge. Tax falls by $25. Net income is down $75.

Cash flow. Net income is down $75. The write-down is non-cash, so add back $100. Cash from operations is up $25.

Balance sheet. Cash up $25, PP&E down $100: assets down $75. Retained earnings down $75.

What to add. This treats the write-down as deductible straight away. If it is not deductible for tax in the period, no cash tax is saved: cash does not change and a deferred tax asset of $25 appears instead. Naming that distinction is a strong finish.

9. The company raises $100 of debt at 10% and holds the cash for a year

Income statement. Interest expense of $10. Net income is down $7.50.

Cash flow. Net income is down $7.50, so cash from operations is down $7.50. Cash from financing is up $100 from the borrowing. Cash is up $92.50.

Balance sheet. Cash is up $92.50. Debt is up $100 and retained earnings are down $7.50, a net rise of $92.50.

The related question. If the debt buys equipment instead, nothing touches the income statement on day one. See raising $100 of debt to buy equipment.

10. The company sells an asset carried at $60 for $100 in cash

Income statement. A gain on sale of $40. Tax is $10. Net income is up $30.

Cash flow. Net income is up $30. Subtract the $40 gain in cash from operations, because the whole sale belongs in investing. Cash from operations is down $10, which is the tax. Cash from investing is up $100. Cash is up $90.

Balance sheet. Cash up $90, PP&E down $60: assets up $30. Retained earnings up $30.

Where candidates slip. They leave the gain in operations and count the proceeds again in investing. The gain comes out of operations so the $100 is counted once.

11. The company pays a $10 dividend

Income statement. No change. A dividend is a distribution of profit, not an expense.

Cash flow. Cash from financing is down $10.

Balance sheet. Cash down $10. Retained earnings down $10.

12. The company buys back $50 of its own shares

Income statement. No change.

Cash flow. Cash from financing is down $50.

Balance sheet. Cash down $50. Treasury stock, which sits in equity as a negative, grows by $50, so equity is down $50.

Follow-up. "What happens to earnings per share?" Net income is unchanged apart from any interest lost on the cash, and the share count falls, so earnings per share usually rise.

Four rules that cover almost every version

If it is not revenue or an expense, the income statement does not move. Buying inventory, buying equipment, raising money, paying dividends and buying back shares all skip it.
A non-cash expense raises cash by the tax saved. Depreciation, stock-based compensation and deductible write-downs all lower net income by 75% of the amount and raise cash by 25%.
Working capital runs backwards. Assets up, cash down. Liabilities up, cash up.
Retained earnings carry net income onto the balance sheet. If your balance sheet does not balance, this is the first place to look.

How to practice

Cover the answers and say each one out loud in under a minute, in the same order every time: income statement, cash flow, balance sheet, check. Then change the number or the tax rate and do it again.

For the bigger picture, see our example answers to how the three financial statements link and what working capital is, and the wider list of investment banking technical questions.

FAQ

What tax rate should I use?

Any round one, stated up front. 25% keeps the arithmetic clean ($10 becomes $7.50 and $2.50). Older guides use 40%, so be ready to redo an answer at a different rate.

What order should I go in?

Income statement, cash flow statement, balance sheet. The cash flow statement starts from net income, and the balance sheet needs the change in cash, so this order means you never have to go back.

What if the interviewer asks about two years?

Do year one fully, then apply the change again for year two. For a purchase of equipment funded by debt, year one adds depreciation and interest, and the last year adds the repayment of the debt.

How do the three financial statements link?

Net income from the income statement is the first line of the cash flow statement and flows into retained earnings on the balance sheet. The change in cash at the bottom of the cash flow statement becomes the cash line on the balance sheet. Non-cash items and working capital explain the gap between profit and cash.

Three Statement Accounting Questions: 12 Worked Answers