Summary

The three financial statements are one system. The connections between them are the single most tested concept in banking interviews — master the walkthroughs below and you can handle any "walk me through the impact" question.

Quick Reference: The 3 Key Links

The Pattern

Every "walk me through the impact of X" question follows the same structure:

1. Income Statement — what lines change, work down to Net Income
2. Cash Flow Statement — start with NI, adjust for non-cash items and cash movements
3. Balance Sheet — update assets, liabilities, equity
4. Balance check — confirm $\text{A}=\text{L}+\text{E}$

The nine walkthroughs below cover the question types you will actually face. Know them cold.

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Walkthrough 1: Depreciation Increases by $10

Assume 25% tax rate. No cash was spent — this is a non-cash expense adjustment.

Balance check: Assets -$7.50 = Liabilities $0 + Equity -$7.50. Balances.

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Walkthrough 2: Issue $100 of Debt

Day 1 — no interest has accrued yet.

Balance check: Assets +$100 = Liabilities +$100 + Equity $0. Balances.

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Walkthrough 3: $100 Revenue on Credit, $60 COGS from Inventory, 40% Tax

Sold on credit (not collected), inventory shipped, taxes owed but not yet paid. This is a favorite at Evercore and PJT — it tests whether you understand working capital.

Balance check: Assets +$40 = Liabilities +$16 + Equity +$24. Balances.

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Walkthrough 4: Sell Equipment (BV $100) for $80, 25% Tax Rate

Sale at a loss. The $20 loss is non-cash from the perspective of CFO — the real cash is the $80 proceeds in CFI.

Balance check: Assets -$15 = Liabilities $0 + Equity -$15. Balances.

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Walkthrough 5: Pay $50 Dividend

Dividends are distributions to shareholders, not an operating expense.

Balance check: Assets -$50 = Liabilities $0 + Equity -$50. Balances.

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Walkthrough 6: Buy $200 PP&E ($100 Cash + $100 Debt), 10-Year Life, 10% Interest, 25% Tax

This is a JP Morgan / Morgan Stanley / Citi favorite. Two time periods — purchase day and first full year.

Year 0 (Purchase Day)

Balance check: Assets +$100 = Liabilities +$100 + Equity $0. Balances.

Year 1 (Incremental from Start of Year 1)

$\text{D\&A}=200÷10=20/\text{yr}$. $\text{Interest}=100\times 10\%=10/\text{yr}$.

Balance check: Assets -$22.50 = Liabilities $0 + Equity -$22.50. Balances.

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Walkthrough 7: Buy $100 Inventory with Cash

This is a Goldman/PJ Solomon question. The key insight: buying inventory doesn't hit the IS — it's an asset swap on the BS.

Balance check: Assets $0 = Liabilities $0 + Equity $0. Balances.

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Walkthrough 8: $100 Asset Impairment (Write-Down), 25% Tax Rate

This is tested at Marathon, Evercore, Houlihan. An impairment charge writes down an asset to its fair value — the loss is a non-cash charge.

Balance check: Assets -$75 = Liabilities $0 + Equity -$75. Balances.

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Walkthrough 9: $10 PIK Interest on Debt

PIK (Payment-In-Kind) interest is NOT paid in cash — the interest gets added to the debt balance instead. This is tested at Houlihan, Bank of America, and Goldman.

Balance check: Assets +$2.50 = Liabilities +$10 + Equity -$7.50. Balances.

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Key Takeaways

• The three statements link through Net Income (IS to CFS and RE), ending cash (CFS to BS), and non-cash adjustments (CFS to BS asset accounts)
• Every walkthrough follows the same structure: IS -> CFS -> BS -> balance check
• Non-cash expenses create a tax shield equal to $\text{Expense}\times \text{Tax Rate}$ — that's the net cash impact
• Working capital changes (AR, inventory, AP, tax payable) explain why profit does not equal cash
• Inventory purchases are asset swaps — no IS impact. Impairments and PIK interest follow the same non-cash add-back logic as D&A.
• If the balance sheet doesn't balance in your answer, you missed something — go back and find it
• Practice these nine walkthroughs until you can deliver them in under 60 seconds each